Watch This One From The Sidelines For Now
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Joy Global (NYSE: JOY), manufacturer and servicer of high productivity mining equipment for extraction of coal and other mineral and ores, reported a sharp rise in its fourth-quarter net income. However, the Milwaukee-based company gave a gloomy outlook for fiscal 2013, reflecting the weakness in the global economy.
Q4 and Fiscal 2012 Results
For the fourth quarter of fiscal 2012, Joy Global reported net sales of $1.6 billion, up 19% over the same period in the previous year. Fourth-quarter revenue beat the consensus forecast of $1.42 billion. The company’s operating income for the fourth quarter was $326 million, compared to $296 million reported for the same period in the previous year. Income from continuing operations was $212 million, or $1.99 per share, up from $195 million, or $1.83 per share reported for the same period in the previous year. Excluding one-time items, the company’s earnings for the quarter were $1.94 per share, well above the consensus forecast of $1.87 per share. Bookings dropped 5% in the quarter to $1.3 billion.
For fiscal 2012, Joy Global reported earnings of $762 million, or $7.13 per share, compared to $609.7 million, or $5.72 per share reported in fiscal 2011. Revenue for the full year rose 29% to $5.66 billion. Bookings for the full year fell 9% to $5.1 billion. The company’s backlog at the end of fiscal 2012 was $2.6 billion.
A Tough Year
Joy Global’s full-year results reflect the tough operating environment experienced by the company. Joy Global saw a slowdown in demand for its products partly due to weak demand in China.
China is a major consumer of raw materials. However, the world’s second largest economy has seen a sharp slowdown in its growth in 2012 due to weakness in the U.S. and Europe, its two main trading partners. As a result of the slowdown, China’s demand for raw materials weakened in 2012. Joy Global said that the slowing of demand in China occurred while new mines were coming on line and some mines particularly in Australia were returning to production and this resulted in a supply surplus that pushed the prices of many commodities down to the marginal cost of production. This, the company said, hurt miners’ cash flow available for reinvestment and reduced the number of projects that meet the necessary economic threshold.
Joy Global also had to make significant adjustments in the U.S., where demand for coal fell sharply. With natural gas prices falling to a record low earlier this year, the demand for coal from power generating companies fell. By April 2012, the share of power generation from coal fell from 43% to 33%.
Gloomy Outlook
Fiscal 2012 was a tough year for Joy Global and other mining equipment makers and things are not likely to improve in 2013. Joy Global expects fiscal 2013 earnings to be between $5.90 per share and $6.50 per share and revenue to be between $4.9 billion and $5.2 billion.
Joy Global said that the outlook for its mining equipment remains weak for now even though it sees some potential for upside. Most of the factors that impacted Joy Global’s 2012 results remain. Although the Chinese economy has shown some signs of improvements recently, the outlook remains weak.
Joy Global noted that its customers have experienced reduced cash flow and with mine capacity in excess of current demand, only the highest quality, lowest cost mines can justify investment.
Mike Sutherlin, President and CEO of Joy Global, said that strong execution will be important as the company begins adjusting to the lower volumes that it expects for 2013. Sutherlin noted that the company is setting its plans for 2013 on the basis that current market conditions continue.
Construction and mining equipment company, Caterpillar (NYSE: CAT) also expects 2013 to be a tough year. Back in October, the company said that it expects slightly better world growth in 2013 with modest improvement in the U.S., China and most of the developing world but continued difficulty in Europe. Caterpillar CEO Doug Oberhelman said in October that he expects 2013 sales to be similar overall to 2012, but with a slightly weaker first half and a slightly better second half.
Deere & Company (NYSE: DE), which manufactures agriculture and construction equipment, last month said that it expects its equipment sales to rise by about 5% for the full year of 2013. Samuel R. Allen, the company’s Chairman and CEO, last month said that although Deere remains well-positioned to carry out its growth plans and capitalize on positive long-term trends, present global economic and fiscal concerns warrant continued caution.
Should You Buy Joy Global?
Joy Global shares have risen sharply even as the company gave a weak outlook for 2013. Shares are currently trading around $59.40, up more than 2.5%. Year-to-date, Joy Global shares have fallen 34%, reflecting the bearish sentiment on mining equipment manufacturers. Caterpillar shares have fallen more than 3% year-to-date. Joy Global shares are trading on a P/E (ttm) ratio of 8.86, which is below the industry average of 10.78 and slightly below Caterpillar’s 9.02.
Joy Global looks attractive in terms of valuation. However, given the outlook for mining equipment manufacturers in 2013, I would remain on the sidelines unless there is a sharp rebound in demand from China.
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