The mining industry had a difficult time in 2013. The industry has been plagued with overcapacity due to a macroeconomic slowdown, resulting in weak commodity prices. This is why the performance of mining equipment and machinery makers such as Caterpillar (CAT) and Joy Global (JOY) has been pathetic. Both reported weak quarterly results last time and issued a weak guidance to make matters worse. Also, none of them expect any relief going forward into the New Year.
Caterpillar in trouble
Caterpillar has had a very tough time. Its latest third-quarter results were bad to say the least. The report was downright ugly as sales were down $11 billion from last year and earnings crashed 44%. According to Brian Langenberg of the Langenberg research firm:
"The third quarter was hideous, the fourth quarter will stink and the guidance for 2014 is very, very subdued."
In light of the terrible performance and expected weakness in the end markets, Caterpillar reduced its full-year forecast as well. For 2014, its sales forecast clearly points to the fact that weakness from mining customers would continue impacting its results. Also, according to Caterpillar CEO Doug Oberhelman:
"Any expansion in the near term is dead, it's over, it's not going to happen."
In addition, Caterpillar recently announced a 12% drop in global retail sales for the three months ending in November 2013. Hence, there seems to be no light at the end of the tunnel for Caterpillar.
Joy Global's woes
Like Caterpillar, Joy Global is also suffering due to oversupply in its end markets. Last year, the global consumption of coal increased 2% to 7.84 billion tons, while production grew 3% to 7.88 billion tons. Additionally, coal consumption growth in China was estimated to have slowed down to 4% year on year in 2012, down from 10% in 2011. This has led to a surplus in coal supplies ultimately pressured pricing. Due to lower prices, mines started deferring capital expenditures and this hurt both Joy Global and Caterpillar.
As a result, even though Joy Global's third-quarter results topped consensus estimates on earnings, investors are still negative about its prospects due to the decline in earnings and revenue from last year. The drop in the order backlog that Joy saw is another concern. Joy Global's adjusted earnings of $1.70 per share in the previous quarter were down from $1.87 in the year-ago period. The company's revenue of $1.32 billion in the reported quarter was down 4.9% from $1.39 billion last year, primarily due to weak sales in the underground mining segment.
Is a recovery in sight?
The global mining equipment market is expected to be worth $117 billion by 2018, growing at an annual rate of 8.5%. Surface mining equipment holds the biggest chunk of this market at nearly 37%, followed by underground mining equipment. The Asia-Pacific region is expected to be the fastest-growing area in the coming years, fueled by increasing mining production and related machinery sales in India, China, and Indonesia.
Moreover, according to the International Energy Agency, coal's share of the global energy mix is rising, and by 2017, coal will come close to surpassing oil. The world is projected to burn around 1.2 billion more tons of coal by then, which is the current combined coal consumption of the U.S. and Russia. According to the agency, China and India are expected to lead growth in coal consumption over the next five years.
In the open-cast mining sector that involves iron ore, there are conflicting opinions over growth projections. Australia, the largest iron ore exporter, forecasts exports to rise 14% in the ongoing fiscal year. Here again, oversupply remains the main concern and this could fuel weakness in pricing due to loss of growth momentum in China and India.
The economic recovery in major commodity markets is probably going to be a long-drawn process and so, the growth in commodity demand will also be slow. The reduction in capital expenditures by the mining industry in general is also an indicator that recovery will be slow.
In such trying times, Joy Global and Caterpillar are trying to keep investors happy through share repurchases and dividends. Caterpillar, for example, has repurchased $2 billion worth of stock this year and raised the quarterly dividend by 15%. Joy Global has also announced a share repurchase to the tune of $1 billion over the next three years.
But from an investment point of view, Joy Global has a debt to equity ratio of 0.46 versus 2.18 of Caterpillar. And with a P/E of 11, the stock is cheaper when compared to others such as Caterpillar (17 times earnings), and that's why, value investors should definitely consider Joy Global.
Where to invest?
Both Joy Global and Caterpillar are facing difficult times and a recovery is not expected in the near future. So, investors looking to buy these companies at their current levels would need to be patient. Additionally, management is looking to keep investors in good spirits through dividends and buybacks. But for those looking for a really cheap option, Joy Global could be the ideal pick. It has a yield of 1.30% and a trailing P/E of just 11.4. The stock has declined almost 37% this year and is worth a look for the long run.
On the other hand, Caterpillar could be a safer pick, even though it has been witnessing steep drops in revenue and earnings. Its huge size, presence in China, brand equity, and diversification across the globe are advantages for the company. Moreover, the company has a nice dividend yield of 2.70% and has held up well this year with the stock remaining flat, but it is more expensive than Joy Global with a trailing P/E ratio of 17.4. So, investors can consider either Caterpillar or Joy Global for their portfolio, but they would surely need to wait for quite some time to see their investments bear fruit.