Joy Global: Mining Profits

Joy Global Inc. (JOYG) is mining profits for itself and its shareholders. Mining equipment is sought after because end demand for commodities is so strong. This puts JOYG in an enviable business position. Current-year earnings estimates have increased 11 cents to $3.39 per share over the past 90 days. Analysts expect earnings to grow an additional 23.1% next year.

Joy Global manufactures surface and underground mining machinery and equipment for the extraction of ores and minerals such as coal, copper, and iron. Hence, the fortunes of Joy Global are inextricably linked to commodity prices of coal and copper. The company has a worldwide presence and offers aftermarket services through facilities and equipment service centers in over 20 countries. Joy Global operates through two segments: Joy Mining Machinery and P&H Mining Equipment.

The company's profitability will benefit from the likelihood of higher mining equipment demand being spurred by strong end-market demand for commodities, capacity expansion projects, an improvement in the U.S. coal business, a lucrative oil sands market, management's continued focus on lowering overhead costs, and earnings accretion from the share buyback program.

While JOYG experienced production bottlenecks over the last few quarters, the supply constraints are a symptom of strong end-market demand rather than a management error. The capacity additions in Milwaukee, Poland, and China were needed as the growing demand for commodities (copper, iron ore, and coal) is spurring producers to invest heavily in mining-related machinery which is supplied by JOYG.

The fundamental outlook for several commodity markets remains strong. The surface mining business is benefiting from a favorable commodity price outlook. The spot price for copper, iron ore and international coal are well above production costs and should spur producers to boost production along with higher orders of new equipment. Higher demand from China more than offsets the impact of softness in the U.S. housing market and has kept copper prices at high levels.

Joy Global's business model centers on driving an increasing amount of service business from existing customers. The margins are higher than the original equipment business and provide a nice base for recurring revenue. This, coupled with increased productivity, effective cost controls, and higher pricing, increased fourth quarter gross margin by 210 basis points (bps) y-o-y to 33.4% and full year FY07 gross margin by 110 bps y-o-y to 32.5%.

JOYG's operating cash flows remain strong. During FY07, cash flow from operations totaled $382 million, up 15.6% from the prior-year level of $330.4 million. Strong cash generation should enable the allocation of capital to capacity additions as well as share repurchases. In Q4FY06, the company's Board of Directors had increased the share repurchase program to $1 billion and extended the expiration date to the end of calendar year 2008 from May 2007.

Current-year earnings estimates have increased 11 cents to $3.39 per share over the past 90 days. Analysts expect earnings to grow an additional 23.1% next year. The stock is attractively valued with a PEG ratio of 0.6. Its long-term earnings growth rate of 33% places it firmly in aggressive growth territory.