Why Reservations About this Mining Giant Appear Overblown
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the world’s biggest equipment makers is not interested in buying it, Mr. Market has given little love to its shares over the past one year, and everyone’s bearish on it. Joy Global (NYSE: JOY) definitely needs a speck of fairy dust to be able to live up to its name. Global, it is. But Joy? Can’t really say so for a stock that has shed a massive 48% over the past year.
Or should I say Mr. Market has been a little too harsh with Joy, and that its stock price at a 52-week low and warrants immediate attention?
Not as bad
While Joy’s top line in recent times grew because of the boom in commodity consumption and mining in the top coal consuming nation China, the situation changed in recent months. China slowed down, and the U.S. coal industry witnessed everything from firms going bankrupt to stocks losing significant value. The dire situation even compelled the world's largest mining company, BHP Billiton (NYSE: BHP), to put its ambitious $80 billion U.S. spending plans on hold, taking time to "pause" and "take a deep breath."
But despite the headwinds and the fact that more than two-thirds of its revenue comes from coal-mining customers, Joy has managed to keep its chin up, with net sales growing 21% and 24%, respectively, during its first and second quarters. Not many are aware that the company also deals in aftermarket sales which helps generate considerable revenue consistently.
That global mining market remains robust was further evidenced when last-quarter sales in its closest rival Caterpillar’s (NYSE: CAT) mining business jumped a whopping 73%. Cat is betting big on mining—a point made clear when it acquired Bucyrus last year and toppled Joy as the player with the biggest mining product range on offer.
Beneath the surface
Now when stalwarts like Caterpillar or a megaconglomerate like General Electric (NYSE: GE) put their money in a business, there must be good underlying value. Two months back, GE announced its plans to acquire not one, but two mining equipment makers in a bid to grab the opportunities presented by the $61 billion global mining industry. GE’s focus? Mining hot spots like China and Australia. China is pegging its coal output to increase by 10% by 2015, and Australia's central bank feels the mining sector could soon be responsible for nearly half of the new jobs generated in the country. Note that while BHP is going slow in the U.S., it is gearing up to invest in Australia.
A lot of steam left
Looks like the U.S. might be giving coal a boot and rooting for natural gas, but elsewhere, coal remains much in demand. True, natural gas did account for the same amount of electricity generated in the U.S. in April as coal, but it’s not so easy to edge out a resource responsible for over 40% of global energy generation completely.
Contrary to what most believe, China continues to import large amounts of coal. Its coal imports during the first half of 2012 were up an astounding 66% compared to last year. Ironically, Europe too is consuming the fuel at a pace not seen in years. While demand for coal grew 3.3%, that of natural gas slipped 2% in Europe last year.
The Asian bet
U.S. coal export figures tell an equally interesting story. According to the Energy Information Administration, the U.S. exported 12.5 million short tons of coal in the month of April, the highest-ever such monthly exports since 1973. First-quarter exports were up 3.5% sequentially and 7.6% from last year, with a quarter of the total exports going to the Asian markets.
It is demand from the Asian markets that will pave the way for companies like Joy. In a recent report, Global Industry Analysts has predicted the coal market to bounce back ‘in the near future’ backed by high Asian demand and abundance of cheap coal. New York-based GBI Research expects consumption of coal in the Asian region to jump more than 60% by the end of the decade.
Final Foolish thoughts
I feel both coal and Joy might have been undermined a little too much. The fact that coal’s share in global energy consumption was the highest since 1969 tells me coal could prove to be a big ground for value hunters a few years down the line. Joy won’t be a laggard then.
Joy’s low share price, a trailing P/E of just 7.7 and a lower forward P/E of 6.52 looks tempting enough for someone who can withstand short-term volatility to bet on a fundamentally strong company with excellent return-generating capabilities. Joy had generated the highest shareholder returns in its industry over a time frame of three years till it started losing out last year. With that said, is the time for action now?
Nehams has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.