Should Joy Investors Be Jumping For Joy?
Marshall 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) spiked 6% earlier this week after posting a quarterly profit that came in above analysts' expectations. The mining equipment maker posted EPS of $1.31, compared to consensus of $1.14. However, Joy investors are not out of the woods just yet.
In conjunction with the earnings release, Joy's CEO cautioned investors about over-optimism:
Although there are growing examples that commodity fundamentals are beginning to turn positive, we expect some delay in translating that into increased mine expansion projects due to a much more cautionary stance on capital deployment by our customers.
The mining industry has been ripe with under-performance and management concerns, with at least 20 mining CEOs getting the pink slip in the past year alone. Rio Tinto's CEO was recently ousted, BHP is looking to replace its CEO, Anglo American recently replaced its CEO, and Vale hired a new CEO last year. Being a maker of mining equipment for coal and ores, this should indeed be a concern for Joy (read about the iron ore headwinds).
What does this mean for the other major equipment makers, including Caterpillar (NYSE: CAT), Deere & Company (NYSE: DE), CNH Global NV (NYSE: CNH) and AGCO Corporation (NYSE: AGCO)? And is there a better way to play the equipment making industry than Joy?
Joy Global and Caterpillar have seen the most pressure during the last twelve months:
While I think there might still be headwinds ahead for Joy, I think major equipment maker Caterpillar might be able to better handle the current environment. Deere, AGCO, and CNH are three of the top agriculture companies (read more about the three here) that are major equipment makers, but have too much exposure to the weak agriculture industry. Deere has seen headwinds in the U.S., and 2013 sales are expected to be modestly higher at 5%. Caution in the U.S. livestock sector is expected to hamper the demand for large equipment such as high-horsepower tractors and combines. Deere gets about 75% of revenues from agriculture, which includes making and distributing farm equipment and parts for tractors, sugarcane harvesters, sprayers and irrigation equipment.
As far as valuation goes, the two pure agriculture equipment companies, CNH and AGCO, appear to trade on the cheap side:
Price to Earnings
- Joy 9.8x
- Caterpillar 9.6x
- Deere 9.8x
- CNH 8.6x
- AGCO 8.4x
Price to Sales
- Joy 1.2x
- Caterpillar 0.9x
- Deere 0.9x
- CNH 0.5x
- AGCO 0.5x
Despite the cheap valuations, I have found reasons to be cautious about both stocks. CNH is the number one manufacturer of agricultural tractors and combines in the world, leading CNH to have robust exposure to the agriculture markets; in fact it's generating some 76% of its revenues from the sector. Also, like Deere, CNH gets the majority (36%) of its revenues from the U.S.
The other headwind for CNH is its high leverage:
- Joy 22%
- Caterpillar 45%
- Deere 59%
- CNH 51%
- AGCO 17%
AGCO is another major manufacturer and distributor of agricultural equipment, with a focus on farm equipment. The company also gets the majority of its revenues from Europe, Africa, and the Middle East, accounting for over 50% of revenues. There have been notable headwinds in Europe, and a continued slowing economy should hamper the company going forward.
Energy consulting firm Wood Mackenzie believes that coal will overtake oil as the world’s largest energy source in 2013. The trend is expected to continue over the interim, as Chinese consumption is expected to increase by 17% over the next four years. However, this doesn’t mean much for Joy. While some investors may take the Chinese coal boom as a positive sign for Joy Global and the mining equipment business, it means less for Joy than some of the actual miners, such as Peabody (read more on the Chinese coal boom). Joy lowered its guidance in December, from an EPS range of $5.90-$6.50 to a new EPS range of $5.75-$6.35. Joy's recent earnings showed that aftermarket and original equipment bookings decreased 20% and 26%, respectively, from the same quarter last year.
Other notable Joy headwind includes the fact that the company gets over 55% of its revenues from the U.S. and only 35% from countries other than the U.S., Europe and Australia. With a $6.7 billion market cap, there is some speculation that Joy could indeed be a buyout candidate (read more here), but its exposure to the questionable mining industry make it a less attractive investment (see about Joy's mining exposure).
Why Caterpillar is a better equipment company
Global growth should be the key driver for Caterpillar, as Morgan Stanley expects solid GDP growth for 2013 of 3.1% and 2014 of 4%. Even more important is the expected growth for China. Morgan Stanley expects China's GDP to grow 5.4% in 2012 and 5.9% in 2013. Caterpillar is expanding its manufacturing plant in Xuzhou, China, which should boost the production of hydraulic excavators by 80%. The future prospects and valuation make Caterpillar a compelling opportunity (see more about my CAT love).
What I like about Caterpillar is that the company has the best expected growth:
5-year Expected EPS
- Joy 11%
- Caterpillar 14%
- Deere 10%
- CNH 11.5%
- AGCO 12.5%
Don't be fooled
What makes Caterpillar the perfect storm is its blend of segment exposures. Caterpillar has a solid mix of revenues, with only 30% derived from three major segments--construction, resources and power systems. Joy has too much exposure to the troubled mining industry, whereas Deere, CNH, and AGCO are over-exposed to the agricultural industry.
mhargra 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!