Two Mining Stocks to Look For
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recession in the US and the financial woes related to it have gripped the economy since 2007, and has affected a majority of the cyclical businesses. One of the businesses hit hardest is the mining sector, which holds a significant place in the US economy. The sinking demand for commodities such as copper and coal resulted in the downfall of mining activities, thereby affecting the construction and mining equipment industry. The companies in this industry had to face some tough times, making investors cautious about this sector.
However, now things are falling back in place. The improving demand of mined commodities and other industrial products is pushing manufacturing activities back on track. And, with this beginning of the recovery phase, the demand for mining equipment is expected to increase in the coming years. I feel this sector is now set for a strong rebound with all the major companies already on the track of recovering.
Today, I am picking up two strong players in the US mining equipment industry, Joy Global (NYSE: JOY) and Caterpillar (NYSE: CAT), both of which are back on track to regain their lost market share. But before we talk about them, let us have a look at another big name in this sector
General Electric (NYSE: GE) is focusing on increasing its foothold in the mining equipment sector. At the MINExpo 2012, the company launched its new business unit 'GE Mining' and is aiming at increasing its annual mining equipment revenue to ~$5 billion in 2016 up from ~$2 billion currently. The company is in expansion mode and is on the lookout for acquiring some mining equipment manufacturers to achieve its ambitious target. It recently acquired Industrea of Australia for ~$694 million, and also bought Fairchild International of the US. Its latest deal with Industrea, the company that provides underground mining equipment to customers in Australia and China, provides GE with an opportunity to further increase its global market presence in the field of mining equipment.
Caterpillar, the leading manufacturer of industrial equipment, has witnessed a lot of volatility in its stock price with a return of just ~2.4% in the last six months. The economic headwinds around the world certainly had its effect on the company's business. But despite all the turbulence in the global economy Caterpillar is focusing on 2012 being one of its best years for sales. Its long-term goals of better product quality, availability and safety to customers, cost reduction strategies, and margin improvement, along with its incomparable brand value, gives it a competitive edge.
Moving on to another major player in the industry, Joy Global has also paid the price for the slowing down of the global economy. But, despite the current subdued environment, the MINExpo 2012 witnessed some positive fundamentals for the company. The company promoted product development as its core area to focus on future growth. As per the current market scenario, Joy Global is focusing on products that are high in efficiency and are also cost effective. It introduced various innovative products in the expo and is expected to generate additional revenue of ~$1 billion by 2017 via these products. To further better its cash position, the company started the 'One Joy Global Initiative' to remove unwanted costs between its Surface and Underground businesses. The company is expecting to save ~$50 million in costs by 2017 via this program. Under this program, Joy Global will align its two segments, Surface and Underground, as much as possible to avoid any duplication of the costs.
Betting Big on China
Both Caterpillar and Joy Global earn a significant amount of their revenues from China and are highly positive in their efforts to turn around their situation in this region. China accounts for ~46% of the world's total coal production in 2011 and is further expected to increase its share in the future. This creates a huge opportunity for both the companies to expand their operations in the region. Moreover, the Chinese government recently approved infrastructure programs for ~$250 billion, which would boost up the industrial activities and result in vastly improved demand for coal and iron ore. Let's see how these companies are planning their strategies in China.
To expand its sales in China, Caterpillar entered into a deal to buy out its Chinese rival ERA Mining Machinery Ltd. In the first half of 2012, the company announced that it has completed its tender offer for ERA Mining. This acquisition would enhance Caterpillar's position in the Chinese coal mining equipment industry and give it the opportunity to capitalize on the strong position of China in the coal market. The company is also increasing its product line in China in the low-price segment to compensate for the company's losses in its core business.
Along the same lines, Joy Global also has a strong focus on China and is continuing to expand its production in the region. The company's investment in the Chinese mining equipment manufacturer International Mining Machinery Holdings (IMM) has increased up to 97%. This acquisition will provide access to a wider share of the Chinese market and would help the company to cope with the increasing demands in the Asian region.
To conclude, I still expect the mining industry to face some modest headwinds in the short run, but their long term growth prospects remain intact. The short term weaknesses of both these companies will be offset with their strong after market sales, which is a major part of their revenues. Looking at the above-mentioned factors, I expect both Caterpillar and Joy Global to enhance their revenue streams, which would push the stock prices in an upward direction. I would recommend buying these two stocks.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and Joy Global. 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!