Is This Mining Equipment Company a Good Buy Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Joy Global (NYSE: JOY) has not had a good time of late. Since the beginning of the year, while the market has advanced significantly, Joy Global has experienced a painful drop of more than 23%. At the end of June, Zacks Investment Research also downgraded the company to Zacks Rank #5 (Strong Sell). The downgrade was due to the sluggish second-quarter results and lower guidance.

However, Tweedy Browne, Joel Greenblatt, Brian Rogers, and Paul Tudor Jones have bought Joy Global for their portfolios. Should we buy Joy Global now? Let’s take a closer look.

Consistently positive cash flow and a conservative balance sheet

Joy Global is a leading maker of mining equipment for the extraction of coal and other minerals and ores, operating in two main business segments: Underground Mining Machinery and Surface Mining Equipment.

Most of its revenue, $3.1 billion, or 54.7% of the total revenue, was generated from the Underground Mining Machinery segment, while the Surface Mining Equipment segment contributed nearly $2.74 billion in sales. In the first quarter of 2013, Joy Global experienced a 15.3% decline in the Underground Mining Machinery segment due to headwinds in the mining sector and the soft U.S. coal market.

What I like about Joy Global is its cash flow generating capability. In the past five years, the company has managed to produce consistent positive operating cash flow. In the past twelve months, its operating cash flow was $447 million while the free cash flow came in at $233 million.

Moreover, Joy Global has quite a conservative balance sheet. As of April 2013, it had $2.88 billion in equity, $235 million in cash, and nearly $1.4 billion in long-term debt. Investors might be excited about the fact that the company generated as much as 52% of sales from maintenance repair and overhaul of its extensive installed base, which could be considered a stable revenue stream.

The market values Joy Global quite cheaply, at only 4.9 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). The dividend yield is 1.4%.

It is the cheapest valued among its peers

Compared to its peers Caterpillar (NYSE: CAT) and Deere (NYSE: DE), Joy Global is the cheapest. The market values Caterpillar at a much higher valuation at 8.72 times its trailing EBITDA. Caterpillar is known to be the global leader in construction and mining equipment, with the majority of its revenue coming from the Machinery and Power Systems segment.

For the full year 2013, the company has revised its sales outlook from $60 billion-$68 billion to $57 billion-$61 billion. The EPS outlook was also lowered to around $7 per share. Investors might be excited after Caterpillar’s announcement that it would make share repurchases of around $1 billion, starting in the second quarter. Caterpillar pays its shareholders a higher dividend than Joy Global, at 2.9%, with a conservative payout ratio of 27%.

Deere also has a much higher valuation than Joy Global, at 10 times its trailing EBITDA. Deere operates in three business segments: agriculture & turf, construction and forestry, and financial services. Most of its revenue, $27.1 billion, was from the agriculture & turf segment while the construction & forestry segment ranked second with $6.4 billion in 2012 sales.

In the period 2004-2013, the company has spent $9.5 billion in share repurchases. For the full year, the company expects to grow its equipment sales by 6%. Its net income is estimated to come in at $3.3 billion.

My Foolish take

Joy Global seems to be a good buy at its current price due to consistent cash flow generation, conservative balance sheet, and its low valuation. Moreover, it derived the majority of sales from maintenance & repair, which is recurring, providing stable cash flow. If Joy Global is valued at 8 times its trailing EBITDA, Joy Global would be worth more than $80 per share. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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