Joy Global Impresses the Street, but Oh, the Cancellations

I listed the over as under on the "reflation" trade as "2 days". So it was the under. The thesis is back after a very short vacation.

One way to the play the mining thesis are the 2 major equipment suppliers - Joy Global (JOYG) and Bucryus (BUCY); we've written about both extensively. I was not quite a fan of this group by last summer, since steel prices had rocketed (as had all commodities) which made the cost to produce their equipment high (thus pinching margins) [May 29: Joy Global with Solid Results - But I'm Not as Bullish as Everyone Else][May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] [May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects], but now of course most commodities (despite a surge the past 6 weeks) are still much lower than peak 2008 pricing. Joy Global is slanted more to the coal market while Bucyrus is more of a broad exposure, but like all things in the market nowadays they (a) trade together and (b) trade with oil almost 1:1.

Joy Global instituted a massive share buyback program last year [Sep 11, 2008: Joy Global to Buyback 1/5th of Shares this Year - 2/5ths by 2011] - the question was would they have the free cash flow to come through. There are no worries anymore about such things - all we know is when oil is up, HAL9000 buys everything in the commodity / global growth universe. We must follow as slaves to the computers.

We have owned these names on and off over the years, last time around we bought Joy Global in mid November under $15, and within 6 days it jumped to over $22, so we quickly jumped out. Those were the days! When every trade worked out. But we're adjusting now - ignore everything and buy commodities and tech on every dip - they exist in a parallel universe of green shoots. The market has been shouting and I finally got it.

The stock was range bound for many months, and made another return to $15 at the March lows. But now... as you can see the chart has one serious bullish condition - just overlay oil prices on top of this stock and I am sure the two would move in nearly 1:1 ratio.


Joy Global reported a number that pleased "The Street," and since the "reflation" trade is back on, all is good in the world. Personally I think the report is irrelevant in the type of market we now exist in; Ciena (CIEN) for example posted an abysmal number, but since its a technology stock, and we're buying commodities, foreign stocks and technology stocks with no questions asked... the stock is up 4%. So as long as oil was up, JOYG would be flying... this is how the program trades are working now, and data like I will post below are just details.

The full report can be found here and these 2 companies have very detailed reports that any investor who still cares about fundamentals should read through - they speak of various regions, various commodities, etc.

• Mining equipment maker Joy Global Inc (JOYG) posted a 20 percent rise in quarterly profit that handily beat market expectations, and forecast 2009 earnings in the upper half of its prior view as tighter cost control continue to pay off.
• Second-quarter net income was $120.5 million, or $1.17 a share, compared with $72.1 million, or 66 cents a share, a year ago. Net sales rose 10 percent to $923.5 million during the period.
• Analysts were looking for a profit of 89 cents a share, before special items, on revenue of $872.1 million, according to Reuters Estimates.
• Operating income, which excludes special items, rose 36% from the same period last year.
• Joy Global management said sales were being hurt by $96 million in canceled orders in the second quarter, raising the total value of canceled orders to $300 million over the past three quarters. Sales were also being hurt by a slowdown in aftermarket order rates.
• Order cancellations were concentrated in North American copper and iron ore, U.S. Central Appalachian coal and Russian coal. Joy Global now believes as much as $525 million of its remaining original equipment backlog could be at risk as well. Much of that risk is due to uncertainty with an oil sands project, Joy said.
• The company, which makes giant shovels, drills and draglines to extract coal, copper, iron ore, oil sands and other minerals, also noted that the second quarter saw some improvement in commodity demand. The company, however, expects near term bookings to remain well below last year and more in line with the rates of new orders received during the first two quarters of this year.
• Backlog is down to $2.7 billion from $3.2 billion at the start of the year.

Guidance and bookings

• The company cited cost-cutting measures for the higher profit, which came despite a big drop in bookings, which fell to $635 million in the second quarter from $1.2 billion last year.
• It expects 2009 earnings of $3.80 to $4.00 a share on revenue of $3.5 billion to $3.6 billion. Analysts expect earnings of $3.55 a share, before special items, on revenue of $3.48 billion.

Still nice and cheap at under 10x forward estimates for the year, and as more shares are retired, the Earnings PER share should continue to benefit. Keep in mind this is a 'lumpy business' and bookings are future orders so that drop is not a green shoot, but I suppose expected. But it causes us to lose a lot of visibility on the future.

Two snippets from

TheStreet

.com that are key

• Management pointed out that China is importing far ahead of demand and cannot sustain production unless domestic demand or the world economy picks up significantly. Mining production (and thus equipment demand) could hit a wall later this year, and management is accordingly cautious.
• Meanwhile, the U.S. market is in the dumps. Coal demand is down as power generators and steelmakers throttle back. In power especially, low natural gas prices are driving a switch to gas from coal, but even with lower coal pricing, management does not see production recovering soon. Steel is a disaster, with production down 50%. Plants are running at 40% of capacity. U.S. iron production is not coming back soon, either.

So we see this same pattern over and over. I love China as much (

ok

, more) than the next guy, but this will be quite the fairy tale if "front loading" production for an export driven boom that is reliant on moribund US, Japanese, and European

costumers

happens as bulls are wishing. But until evidence surfaces that speaks otherwise, we can talk up the great dream and buy stocks accordingly.

Here are some

positive comments

from an analyst on the name

Comments

[wow-me:]

will the author please proof read his article-
I listed the over as under on the "reflation" trade as "2 days". So it was the under. The thesis is back after a very short vacation.

One way to the play the mining thesis are the 2 major equipment

Jun 05 08:26 AM

[Jake2:]

Much of the article is incoherent. I will leave whether the thinking is or is not incoherent, fuzzy, muddled up to the reader.

Jun 06 01:16 PM