After multiple buyout merger offers over the last year, this company said they were all undervalued. Buyers may not be deterred by the snub and new acquirers may appear.


Stocks Dropped from Watch List:


XOP - S&P Oil Exploration ETF

This position was opened on 3/2 when the XOP traded at $25.75 and was moved to the active play list.

TOL - Toll Brothers

This position was opened on 3/1 when TOL traded at $28.50 and was moved to the active play list.

DIS - Disney

This position was opened on 3/1 with a DIS trade at $97.50 and was moved to the active play list.


Active Watch List Stocks:


TRN - Trinity Industries

This position remains unopened until TRN trades at $17.75.


New Watch List Entry:


UTX - United Technology - ETF Description

United Technology is an $80 billion company that provides technology products and services to building systems and aerospace industries worldwide. They build elevators, refrigeration units, electronic security products, electric power generation and management, etc. The aerospace segment supplies flight sensing and management, engine controls, intelligence, reconnaissance, maintenance, engine components, landing systems, etc. I could go on for several paragraphs but the key here is that they do everything and do it well.

A couple weeks ago Honeywell and United Technology acknowledged they had held talks about a merger/acquisition. Honeywell reportedly offered $108 billion or $108 per share for the company. United said the offer undervalued the company and would not succeed in getting regulatory approval. Honeywell "strongly" disagreed with that assesement.

Honeywell and United have been talking on and off for 15 years about some sort of merger because their business lines would fit together very well. Reportedly there were serious discussions in may 2011 when UTX approached HON about a merger. Those talks failed and the companies began talking again in April 2015. Those talks also failed to reach an agreement.

Honeywell approached the chairman and the CEO of UTX again in February and initial talks were highly positive. However, they fell apart again a week later when UTX said the price was too low and they could never get regulatory approval.

On March 1st, Honeywell said it had dropped all plans to pursue an acquisition of UTX because the company appeared unwilling to negotiate.

A UBS analyst recommended buying UTX because the "company is still in play" whether from Honeywell or somebody else. With shares at $97 and the last "undervalued" Honeywell offer at $108 that leaves plenty of room for upside. Even if no acquisition comes to pass, the shares were trading at $125 last March. With acquisition interest I believe UTX shares could head back to those highs over the next few months, market permitting.

Earnings are April 19th.

I am recommending two entry points for this position. If shares move higher, we will enter the play at $98.25. If shares move lower in a weak market we will enter the position at $94.25. ONLY ENTER ONE POSITION using the first entry point that is hit.

With a UTX trade at $98.25, buy Jan $105 LEAP Call, currently $3.65

With a UTX trade at $94.25, buy Jan $100 LEAP Call currently $5.60



Active Watch List Play Descriptions:


TRN - Trinity Industries - Company Profile

Comments:

Trinity starting to move higher. Shares traded up to $17.53 on Friday with our entry point at $17.75.

This position remains unopened until TRN trades at $17.75.

Original Trade Description: February 21st:

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed last week after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

They are also divesting their galvanizing business, think galvanized highway guardrails, and are slowing production in the highway products division and aggregate business.

The key here is that Trinity is now trading at a PE of 3. Yes 3.47 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock is extremely oversold and should recover as the shock of the post earnings drop wears off and oil prices begin to rise. Note on the chart that the stock price began to decline at the same time the price of oil began to crash in August 2014. I view this as a remarkable opportunity for long-term investors.

I am recommending the $23 2018 LEAP to get us well past the recovery in oil prices and any further weakness in the sector. Remember, Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

I understand that buying a 2018 LEAP is a stretch of the imagination for some investors. However, at $2 you will not have much at risk and it becomes a buy and forget investment. If Trinity returns to the 2015 highs at $35 that LEAP would be worth $12 and a 500% return. With a PE of 3.47 there is very little risk.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

I am still going to put an entry trigger on this position. Since the post earnings drop is only one day old we do not know if it will continue. I would love to buy this stock as cheap as possible but I also do not want it to run away from us. If it continues lower, I will change the strike price and entry to keep pace.

With a TRN trade at $17.75

Buy 2018 $23 LEAP Call, currently $2.45, no initial stop loss.



If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now