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Elevator Pitch

Stocks in the coal business may have lost some steam over the past year, but they're definitely not going extinct any time soon. The market has steeply discounted many stocks in the sector and there's still opportunity to take advantage of some cheap valuations.

Company Description

Joy Global (JOY) is a major manufacturer and servicer of mining equipment, which is used to extract copper, iron, oil sands, but most importantly coal. The stock price is very closely correlated to the price of coal, so that's something to keep in mind whether you're bullish or bearish on coal.

Thesis & Catalyst For Joy Global Inc. (JOY)

It's as simple as this: Joy Global is extremely undervalued relative to earnings. Earlier this month, the company released some strong earnings: for Q4 of 2012, the company posted EPS of $2.13, beating the Street's expectations of $1.91. Now that's not exactly a huge deal; after all, it's only one quarter. But the company has had positive quarterly EPS growth YoY for each of the past 9 quarters at an average clip of 27.12%. Pretty impressive, if you ask me. Now I'm sure many of you out there are not impressed with the stock's price action over the past year or so; but I'm investing in the company, not its stock price. Long-term investing is tried and true; and if you're willing to put up with short-term volatility and hold onto this name for some time, your patience should be rewarded handsomely. Price will follow earnings eventually; but until then Joy Global is an absolute steal.

For those of you out there looking for a catalyst to send the stock price soaring in a trading session or two, you're looking in the wrong place. I see Joy Global as appreciating moderately over an extended period of time to keep pace with earnings. More dramatic price movements would require an extreme change in investor sentiment in regards to the coal sector, which seems unlikely at this point.

Valuation

  • Market Cap: $6.63 billion

  • Current Share Price: $62.52

  • 52 Week Range: $47.69-$96.00

  • Trailing P/E: 8.76

  • PEG: 1.33

  • Price/Sales: 1.18

  • Price/Book: 2.59

By looking at the above statistics, the market is pretty much giving Joy Global away. Currently the company is trading 34% below its 52-week high, not to say that it can get back up there as easily; but it's enticing nonetheless. The P/E, PEG, P/S, and P/B are also below the industry average, further making Joy Global's valuation appear mouthwatering to value investors.

(Some additional statistics below)

  • Operating Margin: 20.71%

  • Profit Margin: 13.46%

  • Return on Equity: 33.88%

  • Total Cash: $263.87 million

  • Total Debt: $1.37 billion

  • Dividend (%): $0.70 (1.1%)

Taking everything into consideration, Joy Global seems to be a good play for those few patient investors out there. The company's earnings power and low valuation are just too hard to resist. And on top of that, it's also an attractive acquisition target. Just this past fall, rumors were floating around that General Electric (GE) would acquire the company to expand its mining reach; though these rumors are long dead, an acquisition isn't out of the question. Whether Joy Global is acquired or not, you can expect to make a hefty profit by picking up shares at current valuations.

Source: The Long Case For Joy Global Inc.