Will Next Week be a Turning Point for this Mining Stock?
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After BHP Billiton’s (NYSE: BHP) big dip in profits and massive go-slow call on spending plans, it might seem a lot to expect a company that provides equipment to miners to deliver. Yet, expectations seem pretty high from mining-equipment major Joy Global (NYSE: JOY), which is set to report its third-quarter numbers next week.
Analysts are expecting Joy’s third-quarter earnings per share to be 17.4% higher than the comparable period last year, and top line to grow by around 26%. Whether Joy meets them is yet to be seen, but all won’t be good with its numbers.
If rival Caterpillar’s (NYSE: CAT) last-quarter numbers are anything to go by, Joy’s third quarter shouldn’t disappoint. Cat’s mining business turned out to be the best performer with a whopping 68% jump in sales -- 31% of it was organic and demand was high from all geographic regions. Joy’s rivalry with Cat assumed greater importance after the latter edged it out last year to become the biggest player in terms of total mining product range on offer.
Analysts’ expectations of 25.9% growth in Joy’s revenue is not unachievable, given that some markets continue to remain steady as was visible in Cat’s last quarter. Cummins (NYSE: CMI) too, during its last quarter call, mentioned how several mining customers are still ordering new equipment, and that it expects demand to remain "solid" for the rest of the year, though coal remains an area of major concern. Its mining engine shipments fell 6% in the last quarter because of a slump in orders from the coal mining market, particularly the U.S. This market, I feel, will be the biggest pain for Joy as more than a third of its sales comes from the U.S., and we all know what a dire situation the U.S. coal market currently is in. Joy also has more business tied to the U.S. underground coal market than Cat, and underground mining equipment accounts for a larger portion of its sales than surface mining machinery.
On the fall
Don’t expect Joy’s aftermarket orders to throw up a surprise in its third quarter. They are likely to have declined year-on-year, denting total booking figures. Aftermarket sales contribute as much to Joy’s top line as original equipment sales, and is thus a major source of revenue. In the second quarter, though the company’s aftermarket shipments (pertaining to previous orders) were up more than 10% from the comparable period last year for both underground and surface mining equipment, new orders fell. While the U.S. market remains soft, demand from international markets has become lumpy in recent months. This, in fact, was the major factor that compelled Joy to cut back its full-year earnings guidance.
The company’s bookings were down 34% in the second quarter, and won’t jump off the downward trajectory so soon. The effect is likely to spill over to its backlog value, which went down to $3.1 billion from $3.6 billion in the second quarter. Note that Cat’s mining business backlog slipped as well in its last quarter.
Silver lining, or black clouds?
The saving grace for Joy could be inorganic growth. Both LeTourneau Technologies, which it acquired last year, and Chinese equipment manufacturer International Mining Machinery (IMM), which it took over recently, are likely to contribute positively to sales and margins during the third quarter. It will be particularly interesting to see what kind of near-term outlook Joy gives for IMM as the aim behind the acquisition was to gain traction in a market that has been shrouded by slowdown concerns lately – China.
With iron ore prices in the nation dipping to multi-year lows, it seems to be a bleak situation. Yet, most companies are hopeful of a turnaround, thanks to government efforts. The latest news also points at further stimulus plans as the year progresses. Cat feels current levels of metal and mining commodity prices are lucrative enough to induce investment, and it has its eyes well set to grab the leadership position in China. BHP might have put its multi-billion dollar expansion plans on the back burner, but it expects China’s stimulus to reignite growth soon. Similar feelings flow at the other mining giant, Rio Tinto (NYSE: RIO), which has been the outlier in terms of growth by sticking to its planned $16 billion worth of expansions this year. Rio expects the Chinese market to pick up by the end of the year, helping iron ore demand to bounce back. Interestingly, China’s coal imports during the first six months were up a whopping 66% compared to last year.
Cut and save
Considering that coal’s share in global energy consumption is currently the highest in over four decades and that Joy derives more than two-thirds of its revenue from coal mining customers, the company’s business is bound to bounce back in the long run. But a lot depends on how Joy tackles the near-term hiccups. One major key to survival could be cost cutting, which Joy thankfully hasn’t overlooked. Through its initiative called One Joy Global, it is controlling expenditures by aligning its two businesses (underground and surface) as and where possible. I am expecting more details on its cost-trimming initiatives in the forthcoming earnings call.
The Foolish bottom line
While Joy’s last year’s third quarter was replete with big growth announcements (acquisitions, to be precise), that action is missing this time around. Naturally, saving cash in such trying times could be the best mantra for Joy. Irrespective of how Joy fares, my long-term bullishness on its stock won’t change.
The company has earned a respected four-star ranking in Motley Fool CAPS, the Fool's free investing community. Its share valuations are no doubt compelling, and most of the fears seem to have already been factored in its price. An earnings beat might just push up its ailing shares. Keep following for earnings updates and all other news on Joy Global by adding it to your stock watchlist. Click here to do it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cummins. 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.