No Joy For Joy Global Investors

Jun. 1.12 | About: Joy Global (JOY)

Shares in Joy Global (NYSE:JOY) fell 5.1% Thursday after the manufacturer of mining equipment reported its second quarter results.

Second Quarter Results

Joy Global reported a strong set of quarterly reports. The manufacturer of mining equipment reported a 45% increase in its net sales to $1.54 billion, driven by strong original equipment sales. Operating income rose 42% to $333.4 million. Growth in revenues and earnings were driven by the acquisition of LeTourneau and International Mining Machines. Excluding these two acquisitions revenue growth came in at 24%, while operating income grew 32% on the year. Net income for the second quarter rose from $162 million to $213 million, or $2.00 per diluted share.

The disappointment in the report came from the booking numbers. Bookings for the second quarter fell 19% to $1.23 billion, compared to $1.53 billion last year. In particular the bookings for the underground machinery fell amidst a weakening US coal market. Orders for original equipment underground machinery fell 62%. Weaker bookings led to a much reduced order book. The order backlog fell some $500 million during the quarter to $3.1 billion.

"Our second quarter reflects both excellence in our execution and concerns over slowing in our markets," according to CEO Sutherlin. "We are very pleased with the performance from our acquired LeTourneau and International Mining Machinery business".

Outlook

Joy Global notices that the US market is correcting quickly during the quarter and furthermore the international market is showing signs of slowing demand. The company focuses on trimming its cost for the short term but it believes there is a sound basis for long term demand for its equipment. Near term orders are moderating and volatile amidst a slowdown in Europe, lower growth in China and a lack of upside demand catalysts in the US. Last week, large international miners re-evaluated many of their large projects.

Lower demand for mining equipment and charges related to the acquisition of IMM will reduce earnings for the entire year of 2012. The company now expects to earn between $7.15-$7.45 per share on $5.5-$5.7 billion in revenue.

Valuation

Joy Global ended its second quarter with some $400 million in cash and equivalents and $1.6 billion in short and long term debt for a net debt position of roughly $1.2 billion. The firm furthermore carries a large $1.4 billion goodwill position on its balance sheet as a result of its phased acquisition of IMM and its acquisition of LeTourneau for $1.1 billion.

After Thursday's correction shares are valued at $5.9 billion which values the firm at 1.3 times annual revenues and 10 times 2011's earnings. On the back of the guidance of Thursday Joy is valued at 1.0 times annual revenues and 8 times 2012's annual earnings. This valuation compared to a multiple of 1.0 times annual revenues and 12 times earnings for its major competitor Caterpillar (NYSE:CAT).

Currently the company pays a quarterly dividend of $0.175 for an annual dividend yield of 1.2%

Investment Thesis

Year to date shares in Joy Global have fallen 26% year to date. Compared to its peak of $96 in February shares have fallen almost 40% to $56 at the moment. Shares have performed considerably worse than its major competitor Caterpillar, which have fallen merely 7% year to date and trade just 25% below its peak of $116.

Shares in Joy are getting hit hard as investors fear about future goodwill write downs after the company made two relatively large acquisitions last year. The company is however relatively healthy and carries a manageable debt load. The 40% correction in recent months provides long term investors with an excellent long term entry point.

Those investors who are concerned about the future prospects of the world economy could set up a relative value spread by going long Joy Global while maintaining a short position in Caterpillar, in order to benefit from a convergence in both companies' valuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.