JOY: A Good Long Term Buy
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Joy Global (NYSE: JOY) is a leading mining equipment manufacturer and operates its business in two primary segments: Underground (~58 % of sales) and surface mining equipment (~ 42% of sales). Joy Global has made significant progress in its internal operational excellence programs, effectively allowing for capacity increases from stronger execution throughout existing factories. I believe that Joy’s forward earnings will outperform the low U.S. coal expectations reflected in the depressed F2013 valuation with the help of emerging-market thermal coal and aftermarket exposure.
Impressive growth trend
Global infrastructure spending should provide a significant cyclical tailwind for mining machinery. I believe that Emerging markets are on a long-term growth trajectory, supported by demographic trends and significant infrastructure spending programs in India, Brazil, and China. Over the past five years, global coal consumption has grown at a 5% CAGR, with China accounting for 90% of that growth. Its relative cost and abundance suggest thermal coal will remain the fuel of choice for emerging-market power generation. The following chart highlights the coal consumption in India and China over the last 6 years. The change that China, and to a lesser extend India, have brought to the coal markets is simply stunning in terms of scale and pace:
Source: EIA and STRH
Story Behind Its Near Term Demand
We believe that the easiest reserves of all commodities have mostly been used. Developing additional sources will push miners into more difficult geologic areas and more remote locations, raising costs and requiring more sophisticated and productive equipment to maximize returns. Therefore, mining equipment spending will continue to rebound as commodity prices remain high.
‘Best of Breed’ due to Strong Fundamentals
The elevated level of new equipment sales during 2008-2012 provide visibility into what should be several more years of strong aftermarket and rebuild activity. As a result of strong fundamentals, we expect capital spending at Joy Global’s principal mining customers and new customers in emerging regions to remain high, which should translate into continued strong order rates. Although competition is high, we expect Joy Global to capture large share as it is renowned as ‘Best of Breed’ in mining equipment segment. Given the company’s coal and aftermarket mix of 73% and 59%, respectively, we believe that investors are underestimating the durability of long term earnings power. Further, we believe improvement of International Mining Machinery (IMM) engineering, processes, and technology makes Joy well positioned to recapture lost market share and return margins to at least the upper-20% range from current levels in the mid-20s.
Following chart highlights the EPS growth of Joy as compared to other heavy machineries company like Caterpillar (NYSE: CAT), Terex Corp. (NYSE: TEX), and Deere & Company (NYSE: DE):
Clearly, Joy has outperformed most of its peers in last several years. We believe same trend will continue for next several years. Joy Global’s value proposition has been to provide the customers with industry-leading reliability while simultaneously providing the lowest cost-per-ton productivity. We expect end markets will remain strong, driven largely by demand from China and India for raw materials for building and energy. Hence, we believe Joy provides a good opportunity to invest for long term.
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