• Facebook
  • Twitter
  • Podcast

Plans to Review Its Strategy Could Deliver Gains

Plans to Review Its Strategy Could Deliver Gains

Eagle Materials Inc. (NYSE: EXP) delivered an announcement with corporate speak, noting that its Board of Directors and management team, with the support of independent financial and legal advisors, has commenced a strategic review of its portfolio of businesses: heavy materials, light materials, and oil and gas proppants.

Traders are familiar with statements like this and the stock jumped.

EXP daily chart

Business Wire reported that the company also announced that its Board has authorized the repurchase of an additional 10 million outstanding shares of common stock. This increase is in addition to the remaining authorized shares under the existing share repurchase authorization.

The total new authorization plus remaining authorization is approximately 10.7 million shares and represents nearly 25% of the shares outstanding.

Funding for such share repurchases will come from internally generated cash flow or with funds from existing or new credit facilities. This repurchase will be in addition to the nearly $300 million Eagle has returned to shareholders during fiscal 2019 through a combination of share repurchases and dividends.”

In an additional piece of news, “the company also announced the planned succession of Mike Nicolais, currently Vice-Chairman of the Eagle Materials Board, to Chairman of the Board. He succeeds Rick Stewart who will continue to serve as a director.

Mr. Nicolais currently serves as Vice Chairman at Highlander Partners, a Dallas-based private equity firm. From 2001 – 2003, he served as a partner in the private investment firm of Olivhan Investments, followed by being named managing director at Stephens, Inc.

Previously, Mr. Nicolais spent 14 years in the Investment Banking division of Donaldson, Lufkin & Jenrette Securities, and was Managing Director and Co-Head of the firm’s Dallas office.

Commenting upon the strategic review, the newly appointed Chairman of Eagle, said

“Today’s announcement is a reflection of our continuous evaluation of strategic and financial options and our deep commitment to driving value for our shareholders.

While we are confident that the continued execution of our strategy, combined with our competitive market positions, production capabilities, long-standing commitment to cost discipline and exceptional employees will maximize the value of each individual business, this portfolio review will help ensure Eagle’s inherent value is appropriately reflected in the marketplace and that we are best positioned to enhance shareholder value.

At the same time, the substantially increased share repurchase authorization demonstrates our continued confidence in the long-term value and cash flow potential of our business.”

The stock is well below its all time highs which shows there could be significant up side potential in the stock.

EXP weekly chart

 A Trade for Short Term Bulls

As with the ownership of any stock, buying EXP could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for EXP

Every day, we scan the markets looking for trades that EXP low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For EXP, the July 19 options allow a trader to gain exposure to the stock.

A July 19 $95 call option can be bought for about $3.40 and the July 19 $100 call could be sold for about $2.10. This trade would cost $1.30 to open, or $130 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $130

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in EXP the maximum gain is $3.70 ($100 – $95 = $5; $5 – $1.30 = $3.70). This represents $370 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $130 to open this trade.

That is a potential gain of about 184% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.