Joy Global's Ludicrous Valuations

 I am initiating Joy Global (JOYG) just over $15 with a 4.9% stake. We have now entered ludicrous valuations.

I was looking at this name under $42 but held off [Sep 29: Interested in Joy Global Under $42 But...]

The company announced in early September (when stock was around $50) it was buying back 1/5th of its shares (at the time!) this year and 2/5ths by 2011 [Sep 11: Joy Global to Buyback 1/5th of Shares this Year - 2/5ths by 2011]- that was when it was a $5B company - meaning the $1B share buyback would extinguish 20% of its shares. Now the company is only being valued at $1.5B!

To date the company has bought $837M of their $1B for 2008, leaving just over $160M left. Operating cash flow last quarter was $142M and we'll probably get an update on their buyback activities in the next earnings report mid December. And there is still another $1B in the tiller by 2011. Which means Joy Global is going private the way things are going. Insane. Or if they remain public their earnings PER share, even if earnings fall off a cliff, should climb as the denominator in income / share count will be shrunk by a huge amount. Not that valuation matters...

Notwithstanding all that, lower steel is good for them as is lower petrol prices as many derivatives (rubber for tires for example) are petrol based - so their whole input cost chain decreases which was one of my main beefs with equipment companies. Even if their business falls off by half due to lack of credit financing, at these prices it won't matter. I cannot pass on these valuations after being very patient on the long side. Could go lower in 6 days or 6 week,  but in 6 months it might not even be public.

However this is the case study that even share buybacks mean nothing in a panic. I'll just wait for the company to tender an offer for my shares as they exit the public markets. Cash flow is king.

Disclosure: Long Joy Global in fund and personal account

Comments

[tranquil tr...:]

hi, interesting article, but i saw no evidence of the buyback anywhere..

besides, with only about $300m in cash it could probably only buy back 20m shares. Unwise in this environment when cash is so precious.

on the earnings front, with all miners cutting doen on output and freezing their CAPEX plans, i can't see how they could sustain the current level of profitability.

Lets suppose that it could garner $200m profits after tax, with the reduced shares in issued down to 85m, that gives an eps of around $2.40 or somewhere around 6x PE. Cheap in absolute terms, but i guess there are better value elsewhere......

2008 Nov 21 10:56 AM

[Stephen Ros...:]

Mark, admire your ideas but would worry about Joy's end markets. All the miners I follow about shutting production. Where is the business going to come from? They want to buy back shares out of future earnings. Again where are the earnings going to come from?
Thanks again for the great work you do. Unfortunately mining is leading the way down with demand collapse.

2008 Nov 21 12:48 PM

[Stephen Ros...:]

Also the one thing you don't want to do is buy back shares. JOYG has already overpaid for its shares. They need to preserve cash for a very long down turn.

2008 Nov 21 12:51 PM