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While Icahn Buys, Option Volume Surges In Commercial Metals

Carl Icahn has put the cross-hairs on a new target. And it seems that some investors were sensing something was up with the stock. The activist investor late Thursday said he now owned a little more than 11.5 million shares of Commercial Metals, or 9.98 percent of the total outstanding.

Carl Icahn has put the cross-hairs on a new target. And it seems that some investors were sensing something was up with the stock.

The activist investor late Thursday said he now owned a little more than 11.5 million shares of Commercial Metals, or 9.98 percent of the total outstanding.

In a regulatory filing Icahn used the same language he generally reserves for activist situations — that the shares are undervalued and that he may speak with management to discuss its business and strategic alternatives.

As of filings at the end of March, this stake would make Icahn the second largest holder in the company, behind AllianceBernstein. At the time, Icahn was the fifth largest shareholder of Commercial Metals, which manufactures, recycle and markets steel and metal products.

The stock surged about 3.5 percent to around $14.80 when trading began on Friday morning.

After Tuesday’s market close, optionmaster.com ranked Commercial Metals second on a top-10 list of stocks showing unusual option activity on tradeMONSTER’s LiveAction data system. According to the report, option volume was 2.028 percent above average. It noted Investors bought the September 16 calls and the December 16 calls, anticipating that the stock would go up.

According to Icahn’s regulatory filing, his investment entities bought his recent round of shares between June 16 and July 28. By the end of Tuesday July 26, he had already bought a bulk of the shares. Remember, you have 10 days to file a 13-D after you trip that 5 percent ownership wire.

So, apparently by then word was spreading on Wall Street that someone was heavily buying Commercial Metals.

However, Icahn himself was a major source of the option activity. According to the filing, he purchased call options representing 6,635,804 shares, which expire on November 16, 2012.

Meanwhile, on June 16 the stock’s trading volume nearly doubled from the prior day, to 2.25 million shares. From June 2 to 9, volume ranged between 600,000 and 976,000.

Once Icahn started buying, daily volume exceeded one million shares for most of the days and on a number of occasions exceeded two million shares and even three million shares.

Commercial Metals is a somewhat surprising holding for Icahn since he has made his best money in recent years on biotech companies.

As of the end of the first quarter — the most recent mandatory disclosure of portfolio holdings — the stock was actually his third smallest holding, way out of the radar of most observers. It is not clear what value Icahn sees in the stock. He did not return a phone call.

Commercial Metals lost money in its August 2010 fiscal year and earnings have plummeted 45 percent over the past five years. However, on June 21 Standard & Poor’s research department raised its rating on the stock to Buy after the company’s quarterly earnings came in way above expectations due to firmer prices and higher volume. It also has a 12-month price target of $19.

In a subsequent report, it said it was looking for a sharp rise in net income in fiscal 2012. “For the longer term, we see EPS generally rising on consolidation in the minimill steel industry, market share gains at the expense of imports, and greater pricing power,” it told clients. “Also, we think margins should expand on the divestment of underperforming assets and a gradual drop in SG&A expenses as a percentage of sales.”

S&P also stressed that the biggest risk are possible declines in steel and scrap prices in 2012 instead of the increases it projects.

Let’s see how this one plays out. Calls to Commercial Metals also were not returned.

Commercial Metals said in a statement that its board and management regularly review all options for generating and delivering value to shareholders, and welcomes all constructive dialogue. It also said one of Icahn’s associates has suggested getting together sometime after Labor Day. “We will meet as we would with any significant shareholder and assess any suggestions they may have, keeping in mind our obligation to act in the best interests of all shareholders,” the company added.

“Ours is a cyclical business and the numerous actions we took during the latest economic downturn have contributed, as expected, to significantly improved operating performance and efficiency,” the statement continued. “While we have work still to do, we are well positioned to deliver strong financial performance and value for our investors.”

Looks like the fun has just begun.

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