There Is Little Joy in Global

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Current economic conditions are affecting the mining industry.

Economic problems in the Eurozone and the sluggish economic recovery in China has impacted the growth of the global commodity demand. Due to these factors Joy Global (NYSE: JOY)  has decreased its sales and earnings estimates for the fiscal year 2013. Since second quarter results were announced, the price of its stock has been continuously decreasing.

Joy Global is one of the leading players in the mining industry. It engages in the manufacturing and service of heavy machinery used in the extraction of coal, iron ore, oil, copper and other minerals. The company has two operating segments; underground mining machinery and surface mining equipment. It also deals in aftermarket parts. Aftermarket parts refer to parts manufacture by a company other than the original manufacturer of the equipment.

Fundamentals

Joy Global reported a second quarter fiscal 2013 net income of $182 million or $1.69 per diluted share, down from $218 million or $2.04 per diluted share in the same period last year. Net sales were $1.4 million compared to $1.5 billion in the second quarter of 2012. Underground mining machinery revenue was down 23.1% while surface mining equipment revenue grew 3% compared to a year ago.

The company generates most of its revenue from coal projects and from manufacturing of equipment used in underground mining. The second quarter bookings decreased 8% to $1.1 billion year over year, but increased 10% sequentially over the first quarter of this year. The strong U.S. dollar had a negative impact on order bookings by $44 million compared to the second quarter of last year.

Profit expected to slip

Due to the persistent economic contraction in the Eurozone and slow recovery in China, Joy Global is expecting a decrease in profits. The company expects a revenue in the range of $4.9 million and $5 million for the fiscal 2013, down from the previous estimate of $4.9 to $5.2 billion while downgrading the earnings per share from $5.75 to $6. 35 to be between $5.60 and $5.80.

Joy vs. Peers

Joy’s stock is currently trading at $49.12. It’s low point in the 52-weeks is $48.34 per share and high point is $69.01 per share.

Joy’s stock value depreciated by 25.5% while its peer Caterpillar Inc. (NYSE: CAT) and Deere & Company (NYSE: DE) trickled down 11% and 7.5% respectively in the first six months of 2013. The significant depression in Joy’s stock value followed the announcement of unsatisfactory second quarter results due to which investors lost their confidence in it.

Besides Joy, Caterpillar is also facing a decline in revenue and earnings. It too, lowered its 2013 sales forecast. CAT’s revenue dropped down from $15.98 billion a year earlier to $13.21 billion in the first quarter of 2013. Due to slow economic growth and lower commodity prices it lowered its 2013 sales forecast to $57 billion from $61 billion.

In the second quarter ended 2013, Deere & Company experienced a 9% increase in revenue year over year, reaching $10.914 billion, driven by the agriculture and turf business. Net income attributed to the company was $1.084 billion compared with $1.056 billion for the same period last year. Its sales are projected to increase by about 5% since the fiscal year 2013 and by about 3% for the third quarter in comparison to the corresponding quarters last year.

Dividend

Joy has a dividend yield of 1.40% which is lower in comparison to Caterpillar and Deere & Company with 2.50% and 2.90% respectively. Joy’s dividend payout ratio was 10.06% in the second quarter, down 2.72% quarter over quarter. Decreasing earnings and reducing the payout ratio indicates that expansion in Joy’s future dividend seems improbable.

Coal Market

Demand for the coal market decreased due to the shifting of electric utilities to natural gas and other cheaper alternatives. Joy generated 55% of its revenue from markets outside the U.S. the Chinese market contributed 18% in its revenue while its competitor Caterpillar only derived 3% revenue from the market in China. The Chinese Market is in bad shape because of the decrease in demand and excessive supply. Things can improve but will take time.

Final Words

Joy’s huge dependence on coal is a sign of concern. China’s slow economy and soft U.S. coal market impacted Joy’s earnings negatively. The stock has greatly depreciated in the last six months. The mining industry is expected to slow this year. The best way for Joy to stay in business is by reducing its dependence on coal. I recommend investors to ‘Hold on’ to this stock and while new investors should wait until the stabilization of commodity prices or substantial growth in the mining industry.


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