The construction industry appears to be set for a recovery as the housing position starts to improve and increased economic activity begins to stimulate non-residential construction. These circumstances have largely uplifted the future outlook of the industry. A number of studies have emerged to show the change in the direction of construction industry. A report by Wells Fargo points out the upswing in sentiment surrounding the construction industry, specifically with regards to non-residential construction.
The mining sections of the construction industry, on the other hand, have been relatively stagnated as companies manufacturing mining equipment faced difficulty in finding major projects in recent years. This also appears to be changing. A number of global miners have shown a helpful development with regards to their preference as they move from high-risk to more volume projects to lower risk projects so as to concentrate on stronger returns. Joy Global Inc. (JOY) is one of the major players in the global mining equipment industry. At the same time, the company has been sold off extensively by investors in the recent downturn. The financial performance of the company has been showing a substantial improvement and despite the decrease in stock performance, the company's profitability is gaining considerable strength. This is also associated with commodity demands from emerging markets, which has supported the industry in a holistic perspective.
More than two-thirds of the company's revenues come from coal mining projects as customers provide coal for steel or fuel production. Therefore, any improvement in activity associated with steel products is likely to in turn increase demand for the company's products. Similarly, as efforts to efficiently produce electricity are being pursued excessively across the globe, the demand for mining equipment is reflecting a comparatively stronger outlook.
Source: Barclays Capital Industrial Conference 2013
Most importantly, growing economies like India and China are looking at an increased demand for commodities such as coal. China is estimated to become the largest importer of coal by 2015. India is also looking at similar upswings in the demand for coal. In order to benefit from this situation, Joy Global has managed to attain a substantial stake in coal producing companies in China. Furthermore, the company's research and development expenses have increased from $29.8 million in FY10 to $47.8 million in FY12. Such strategic allocation of funds is allowing Joy Global to position itself so as to experience profitable growth over the coming years.
The above chart shows the stock performance of Joy Global and Caterpillar Inc. (CAT) as compared to the S&P 500 index. The chart clearly reflects upon the underperformance of the two companies as compared to the industry index; however, the market has not priced the growth prospects of the industry, which makes the current prices attractive for investors.
The financial performance put forth by the company in the post-crisis period has reflected a strong recovery as the company has maintained strong margins and the revenue growth has remained strong.
Data Source: Morningstar
The above chart shows the income statement summary of the company since FY08. The revenue growth has been effectively converted into earnings through strong profitability. The company is currently operating at a TTM operating margin of 20.8% as compared to the industry average of 12.5%. The return on equity and assets is also substantially above the industry averages and over the last three years, the industry has only experienced an average revenue growth of 0.9% per year; whereas, the company's corresponding growth figure is 16.3%.
In order to evaluate the company as a prospective investment, a few valuation metrics also need to be considered along with the growth capacity and prospects of the company.
Data Source: Morningstar
The above table shows some key valuation statistics of Joy Global as compared to the industry averages. We can clearly see that the company has been undervalued by the market as it is being traded at a considerable discount.
The above chart shows the company's PEG ratio over the last one year. The current figure of 0.45 indicates that the company is substantially undervalued with respect to the expected growth in the company's earnings over the coming years. This high degree of undervaluation makes the company an attractive opportunity for equity investors.
Joy Global has been strengthening its position by adapting different strategies to support growth. In recent years, the company has experience a remarkable top line growth. The company has also proved its emphasis on growth through acquisitions and the research and development costs have also been increased in order to support growth through the development of new products. The industry has been subject to a slow performance in recent years but the trends seem to indicate a recovery and Joy Global is well positioned to benefit from such a situation. Therefore, I propose a buy recommendation as the company reflects outstanding financial strength, stability and strategic intelligence, which is required to utilize such opportunities.