Mining For Profits: Is This Leading Manufacturer The Best Bet?

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

Joy Global’s (NYSE: JOY) shareholders have not done particularly well over the last few years.  This leading maker of mining equipment has been hit with reduced demand for its products, primarily driven by the reduced usage of coal due to cheap natural gas, as well as the generally uncertain global economy.  As a result, shares are off about 40% from their peak of $103 in 2011.  With Q1 2013’s earnings set to be released next Wednesday (Feb. 27), investors will be looking for signals that the time is right to jump back in.

As mentioned, Joy Global is a leading manufacturer of mining equipment and related parts and services.  The company operates in two major segments, underground mining (53% of sales) and surface mining (47%).  Joy Global maintains facilities and offices in most major mining centers of the world, such as Australia, Brazil, Canada, Chile, China, India, Russia, South Africa, and the U.S.

Underground mining includes all equipment used in the extraction of minerals from underground mines, including continuous miners, road headers, shuttle cars, conveyor trains, and a long list of other products.  Surface mining is the world’s largest producer of electric mining shovels, and also produces rotary blasthole drills and walking draglines.

The company has been very aggressive with acquisitions in order to expand its operations, most recently with the $1.1 billion acquisition of LeTourneau in 2011, and the acquisition of China-based International Mining Machinery Holdings, completed in May 2012.

With major competitors including Caterpillar (NYSE: CAT), whose 2011 acquisition of Bucyrus makes them Joy Global’s biggest competitor; Komatsu (NASDAQOTH: KMTUY), a Japanese heavy equipment manufacturer; and Terex Corp. (NYSE: TEX), a slightly smaller but very significant player in the mining equipment game.  So, assuming you think the mining industry has brighter days ahead, is Joy Global the best bet, or is one of these others the way to go?

Joy Global trades for just 8.6 times TTM earnings, which are unfortunately projected to decline in 2013, from $7.24 to $6.20.  After that, however, their business is projected to pick up, and consensus estimates call for $6.49 and $7.87 in 2014 and 2015, respectively.  With the company’s outstanding history of growing revenues (see chart below), trading at just 7.9 times 2015’s earnings sounds pretty good to me.

 

Let’s take a look at its peers and see if we can find an even better opportunity…

Caterpillar, the largest in the group by far, trades at a slightly higher premium of 10.7 times TTM earnings, and is also expected to have a similar earnings drop this year, with $8.03, $9.42, and $11.15 per share expected over the next three years.  In terms of far-off earnings, Caterpillar trades at 8.6 times 2015’s projected earnings, slightly more than Joy’s -- but bear in mind that with the increased diversification of Caterpillar’s business, there is inherently less risk associated with investing.

Komatsu appears to be even more expensive, trading at 16 times TTM earnings, which are projected to drop this year, just like the rest of the group.  While Komatsu does have a slightly stronger balance sheet than the others, with less debt relative to the size of the company, it is not to the extent where it warrants a premium valuation.  Additionally, Komatsu is the only one so far that does not pay a dividend, which is a big deal to most long-term investors.

Finally, Terex looks to be the most expensive of all on the surface, at 27 times earnings.  However, and this is very significant, Terex is the only one of these companies that is not projecting a decline in earnings.  In fact, when Terex reports this week, they are expected to have earned $2.03 in 2012, which is projected to rise to $2.66 and $3.32 in 2013 and 2014, respectively, for an average forward growth rate of 27.9%, more than justifying its lofty valuation.  Additionally, Terex has possibly the best balance sheet of the three, with almost as much cash on hand as it has debt.

As far as which one is the best investment, I’m still going with Joy Global.  While Terex and that growth rate certainly looks interesting, Joy Global’s valuation combined with its market-leading status is too cheap to ignore, especially if you believe (as I do) that natural gas has bottomed and demand for coal will rise going forward.

 


KWMatt82 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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