Investors in Joy Global (JOY) applauded the company's second quarter earnings release as the company met low expectations.
More importantly, bookings are surpassing revenues again thereby adding to the company's backlog as the company is seeing emerging trends, which warrant optimism.
Second Quarter Highlights
Joy Global reported second quarter revenues of $929.7 million, which was down 31.7% compared to last year. Revenues fell slightly short versus consensus estimates of $932.1 million.
Income from operations fell by 59.3% to $74.0 million resulting in earnings of $0.73 per share. After backing back-out restructuring charges among others, Joy reported non-GAAP earnings of $0.76 per share, which beat consensus estimates by five cents.
Looking Into The Developments
The sales decline was driven by softness in the surface mining equipment business where revenues plunged by 37.8% to $443.6 million. This in turn was driven by a 66% drop in original equipment sales. Operating earnings roughly halved to $83.5 million as the flexible nature of the business model limited the decline in operating margins, which fell by 440 basis points to 18.8%.
There is no quick fix for the business in sight. Orders dropped by 31.4% to $488.0 million as the company actually boosted the order book after posting a book-to-bill ratio of 1.10. Notably original equipment bookings were weak driven by tough comparisons while service bookings were actually up by 2%.
Underground mining machinery sales were down by 24.1% to $517.9 million. Original equipment sales fell by 47%. Margin pressure was more severe in this area with operating margins contracting by 720 basis points to 13.8%. Interesting to note, bookings were actually up 34.4% although it was from very low numbers.
Bookings of $600.5 million for the underground mining machinery unit resulted in a rather healthy book-to-bill ratio of 1.16. Original equipment orders more than doubled driven by expansion projects in Canadian oil sands.
Looking Into The Year
Joy continues to face challenging market conditions while incremental positive signs are arising on the horizon. This is witnessed in incremental improvements in bookings, which are still falling overall. Ironically, the positive news is that as actual sales fell harder the order book is actually increasing.
The big item in the news report was the company's optimism about the Canadian oil sands region, naming it the biggest unconventional source of oil production in the coming two decades.
Based on the current conditions, Joy is reiterating its full year revenue outlook for $3.6 to $3.8 billion in revenues. Adjusted earnings, excluding restructuring costs and other items are seen between $3.10 and $3.50 per share.
Joy does anticipate that the second half of the year will be stronger than the first half as incremental improvements will show up in the results.
Valuing Joy Global
Joy Global ended the quarter with $385.8 million in cash and equivalents. The company does have roughly $1.3 billion in various kinds of debt outstanding, resulting in a net debt position of little over $900 million.
A minor point of concern, total inventories fell by just a percent to $1.13 billion as relative inventories have increased a lot. I do however find comfort in the improving order intake, which does alleviate a lot of these worries.
At $59 per share, Joy Global is valued at $5.9 billion. This values equity in the firm at 1.6 times annual revenues and 17-18 times forecasted adjusted earnings.
The quarterly dividend of $0.20 per share provides investors with a yield of 1.3%. On top of that are the very modest repurchases as Joy repurchased just $7 million worth of stock over the past quarter. The company still has $656 million in repurchases being authorized at the moment.
Tough Operating Environment
Joy Global operates in a tough environment as global miners are slashing capital expenditure budgets amidst falling commodity prices. The company has focused on productivity and operational improvement in the meantime.
Within surrounding mines, Joy offers materials and services for extraction, crushing, power systems, motors and drives, conveyor belts and controls and automation, among others.
As part of the February Barclays Industrial Select Conference, Joy Global reiterated its focus on direct servicing, operational excellence, new product development as well as China and other emerging markets. Notably the shift to services is important, with service sales already making up 50% of total sales. Service sales tend to be more stable and more profitable.
In the meantime, Joy Global has pushed for cost cuts to offset most of the pain of falling revenues on the bottom line. The first phase of cost savings delivered $47 million in cost savings in 2013. Phase II is set to deliver another $60 million in savings this year while the final phase could save another $15 million later this year.
Despite the measures to control costs, topline revenues are still seen down some 35% from their peak of $5.7 billion in 2012.
Implications For Investors
Joy is facing difficult times at the moment, yet the company remains profitable and positive signs are emerging. The company is adding to the backlog, which rose to $1.6 billion this quarter as notably bookings for the strategically important service orders were up. While overall orders still fell by 7% compared to last year to $1.05 billion, order intake was up 22% from the first quarter.
These emerging bright spots are important as operating leverage could see a boost if revenues stabilize and can grow again later this year. Strong cost control, operational excellence and targeted investment like the recent acquisition of Minin Technologies, can drive appeal going forwards.
The results, but even more so the booking numbers and cautious optimism could signal that Joy has turned the corner and better days might be ahead again. I remain cautiously optimistic, yet more improvements have to materialize to justify the trend. That being said, I am a buyer on any meaningful pullback.
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.