This Stock Should Only Move Up From Here
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Did Joy Global’s (NYSE: JOY) third-quarter numbers disappoint me? No. Did its lowered guidance shock me? No.
So am I expecting the stock to pop at the blink of an eye? No. Which means I am writing it off, is it? No.
It means I am patient, and I know the stock will not fail me in the years to come. So irrespective of what it did in the last quarter, my faith in Joy stays put.
Why am I rejoicing…
- Joy’s third-quarter revenue grew 22% from the year-ago quarter, marking the fifth such straight quarter of double-digit top line growth for the company.
- Operating profit margin remained strong at around 20% of sales. Cost cutting was a contributing factor. Net income climbed 12% from the year-ago period.
- Recent acquisitions seem to be doing just fine. Both its LeTourneau and IMM acquisitions contributed positively to bookings, sales and operating profits. They are acting as saviors, protecting Joy from headwinds to some extent.
…and why I am not
- Joy’s bookings slipped 25% from the year-ago quarter, suggesting how mining customers are holding back projects and purchases.
- Backlog value slipped to $2.8 billion from $3.1 billion a year ago. Backlog is a key indicator of future potential revenue, so a decline is naturally not good.
- Worst of all, for the second time this year, Joy lowered its full-year revenue and earnings guidance.
Time to take stock of the situation
With the U.S. market accounting for more than a third of its total sales, Joy can’t help but sulk right now. The sharp dip in natural gas prices has wreaked havoc with coal companies, putting the very existence of some into question. The shift to natural gas from coal to generate electricity had actually been brewing below the surface for long, we just didn’t see it -- while coal’s share fell by 11 percentage points in the last 5 years or so, natural gas’ share rose by 14 percentage points at the same time. Only when natural gas prices hit the bottom of the barrel did the shift become so prominent.
Gas prices are breathing a little easier, but are likely to take a long time before they bounce back. Till then, coal companies will feel the heat, passing it on to those like Joy who provide them with the necessary equipment to dig. Slowdown concerns are too big to ignore, particularly when industry rulers start hitting the warning bell -- BHP Billiton ) has slammed the brakes on its ambitious $80 billion expansion plans (which included new mines) over the next five years. The latest news is that the mining major is about to lay off several employees at its Australian Olympic Dam copper and uranium mine project to save costs.
Green signal
Interestingly though, Rio Tinto (NYSE: RIO) isn’t as scared, and continues to stick by its earlier plans of spending $16 billion this year. Where is the confidence coming from? Markets outside the U.S., China in particular. It was this nation that fueled the boom in commodity prices, and it is this nation that has frozen the world with fears. But hopes are alive, and deepening.
Caterpillar (NYSE: CAT), the construction-equipment king that toppled Joy to become the company with the biggest mining product range on offer, is bullish on China. Cat actually supported the slowdown in China, terming it as "the best thing" to have happened to give the what-seemed-to-be unsustainable-growth a breather. Cat doesn’t do a lot of business in China yet, but is investing heavily in the nation. BHP expects the environment in China to improve from early next year, and Rio feels the Chinese economy is likely to start turning around by the end of this year. Hopes are pinned on the next Chinese government’s stimulus that many feel is just around the corner.
China actually continues to import heavy amounts of coal – its coal imports were up an astonishing 52% year-over-year in the first seven months of the year. But coupled with continued high production in the nation, this is leading to inventory pile ups and price pressures. Joy, which has considerable presence in China, will have to wait for the turnaround, which in turn could take months to arrive. Yet, it could be swifter and more stable than that in the U.S. market.
Wait for results
Maybe Joy should take heart in the global markets after all. Apart from China, mining markets like Australia feature high on the list of those putting their money on mining. Caterpillar and General Electric (NYSE: GE) are two great examples. The Southeast Asian region has pulled both companies, holding up their optimism on the mining sector. GE purchased Australia-based mining-equipment maker Industrea and joined hands with state-owned Chinese coal company Shenhua Group recently to dip its fingers into the mining business. And Cat has just taken over Chinese equipment-manufacturer ERA Mining Machinery and is widening dealer network in Australia.
The point I am trying to drive home is that the coal business is not going to go under. U.S. coal exports are in fact the highest in more than five years. It is just a testing phase for Joy, and I believe it will come out unscathed.
There will be Joy
Joy is wisely targeting its U.S. operations for cost-cutting initiatives. Saving money for brighter days is a wise move, no doubt. Given how the company has managed to keep its chin up in such trying times, evidenced by growing revenue and earnings quarter-after-quarter, Joy should bounce back well in time.
It’s a weak phase, but it’s temporary. And Joy’s prices have been pounded bad enough to reflect all the uncertainties. Even at the lower end of the revised guidance, both revenue and net profits will each be 20% higher from 2011, which is commendable. I am certainly not writing Joy Global off, for I see higher upside and limited downside in the stock now. Only, patience will be the key. Click here to add Joy Global to your stock watchlist to catch its turnaround.
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