Joy Global - Weakness Continues As Joy Issues A Weak Full Year Outlook

Dec.12.13 | About: Joy Global (JOY)

Investors in Joy Global (NYSE:JOY) continue to have a tough time. Bookings, revenues and earnings have tumbled in 2013, as the company sees an acceleration of the correction into 2014.

It is too early to go bargain hunting, despite depressed levels. I remain on the sidelines. Yet keep Joy Global on your watchlist to go bottom fishing in a $45-$50 range.

Fourth Quarter Results

Joy Global generated fourth quarter revenues of $1.18 billion, down 25.9% on the year before. Despite the dramatic fall, revenues came in ahead of consensus estimates of $1.14 billion.

Earnings were decimated coming in at just $26.8 million, down 87.4% on the year before. The company took an asset impairment charge of $155.2 million, largely explaining the drop in earnings.

Reported earnings came in at just $0.25 per share, while adjusted earnings per share were down by 47% to $1.11 per share, missing consensus estimates by a penny.

CEO Mike Sutherlin commented on the fourth quarter developments, "This quarter once again demonstrates outstanding execution in a difficult market. We were very encouraged by the sequential recovery of aftermarket orders. This puts us almost back to the levels of a year ago, even though some regions are still lagging. It was especially good to see the return of machine rebuilds to the U.S. underground business, which is an important step in the recovery of this market segment."

Looking Into The Results..

Sales continue to suffer, driven by strong sales declines in the surface mining equipment business. Revenues in the business fell by 36.0% to $535.5 million, while underground mining machinery sales were down 15.9% to $696.3 million. The company noted that adverse currency movements shaved off three percent in revenues.

Total bookings came in at $1.08 billion, down 18.6%. This didn't do much good for the backlog with a book-to-bill ratio of 0.91. Notably orders for original equipment and mining equipment were very weak.

Operating earnings took a beating as well, even when adjusting for one time items. Operating margins fell by 560 basis points to 16.3%. Reported earnings took a greater beat due to the amortization charges which totaled $155.2 million.

..And Ahead

Joy Global still sees more pain ahead into its fiscal 2014. Full year revenues are seen between $3.6 and $3.8 billion, down some 26% from revenues being generated in 2013 at the midpoint of the range.

Earnings per share are seen between $3.00 and $3.50 per share, excluding one-time charges. This implies that earnings are seen around $325 million.

Consensus estimates for revenues in 2014 stood at $3.80 billion, as earnings were seen at $3.67 per share by analysts.

Valuation

Joy Global ended its fiscal 2013 with $405.7 million in cash and equivalents. Total debt stands at $1.31 billion, for a net debt position of around $900 million.

Full year sales came in at $5.01 billion, down 11.5% on the year before. Reported earnings were down 30% to $533.7 million, on the back of lower sales and the impairment charge.

Trading around $54 per share, the market values Joy Global at roughly $5.7 billion. This values operations at 1.1 times annual revenues and 10-11 times annual earnings.

Joy Global pays a quarterly dividend of $0.175 per share, for an annual dividend yield of 1.3%.

Some Historical Perspective

Long term holders in Joy Global have seen solid returns accompanied by high volatility. Shares rose from merely $3 in 2003 to highs of $80 in 2008. Shares plunged to $20 in 2009 but ever since recovered to highs of $100 in 2011.

While the general economy has made further progress ever since, prospects for Joy Global have been poor, with the share price being cut in half again. Between 2009 and 2012, Joy increased its annual revenues by a cumulative 57% to nearly $5.7 billion. Earnings rose even faster to $762 million in the meantime.

The guidance for 2014 implies that Joy has given up all of its achieved growth in recent years. The forecast for next year implies that revenues are similar as those being achieved in 2009.

Investment Thesis

Joy Global continues to focus on the cost base of the business. The company already took out a lot of costs in a structural manner resulting from the Operational Excellence program and the One Joy Global initiative. This results in the fact that the company remains profitable, despite a dramatic fall in revenues being projected for next year.

At the same time, this results in an improved operating leverage profile once the market will recover. These steps are important as bookings remain dismal, although the worst declines appear to be over. As the book-to-bill ratio was again below 1 over the quarter, the backlog saw further pressure and fell to $1.5 billion, representing about 5 months work based on 2014's guidance.

Despite the dramatic results and the poor outlook, Joy continues to make improvements which will pay off in case of an economic recovery. Besides cost cuts, the company spend $214 million in the quarter, to retire nearly 4% of its shares in just a quarter's time. Yet the recovery might take some more time, as large miners in particular are still holding off projects until prices of key commodities recover in a meaningful way.

Back in August of this year, I last took a look at Joy's prospects. I concluded that there was no Joy for investors with shares trading around $50 per share. I noted that continued oversupply in the so-important coal market was the major reason behind the strong decline in bookings.

To offset falling revenues, Joy has already embarked on three separate cost cutting programs, making the company lean in these dark days. I noted that it might be time to go bottom fishing with an annual revenue rate of $4 billion and earnings of $300 to $500 million. In reality, Joy now sees 2014 revenues of $3.7 billion and earnings of $325 million, both on the low end of expectations.

As such the outlook is weak, yet the valuation already reflects this to a great extent. The solid balance sheet, profitable operations and continued focus to remain lean combined with repurchases are bright points. Long-term investors might pick up a few shares in the $45-$50 range and wait for better times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.