Joy Global: Shares Are Suffering From A More Severe Slowdown In China

Sep. 2.12 | About: Joy Global (JOY)

Shares of Joy Global Inc. (NYSE:JOY), the manufacturer of mining equipment, ended a volatile week with losses of close to 4%. On Wednesday, the company announced soft third-quarter results.

Third Quarter Results

Joy Global reported third quarter revenues of $1.39 billion, up 22.2% on the year. Revenues came in below analysts consensus of $1.42 billion. Bookings fell from $1.45 billion to $1.08 billion, diluting the current order book to around $2.84 billion.

Income from continuing operations rose from $172 million to $194 million, or $1.82 per diluted share. On average, analysts consensus was for the company to earn $1.90 per share.

CEO Mike Sutherlin commented on the results:

"Our results this quarter continue to show strong execution, but against a market backdrop of adjustment to lower demand for U.S. coal and continued slowing of the Chinese economy. The original equipment order rate is impacted by a project pipeline that has slowed but still has several new projects that should reach equipment selection in the near term."

Segmental Information

Underground Mining Machinery

Sales at the underground mining machinery rose 2.4% to $684.9 million. Sales were driven by strength in Australia, partially offset by weakness in other areas. Bookings fell by 25.5% to $553.8 million, resulting in a book-to-bill ratio of just 0.81. A soft US coal market and weak market for original equipment manufacturing across the globe, resulted in soft bookings. Operating profit rose to $164.0 million, as operating margins increased by 50 basis points to 23.9%.

Surface Mining Equipment

Sales at the surface mining equipment rose 21.6% to $564.6 million. Sales were driven by strong original equipment sales across the globe, with the exception of South Africa. Bookings were weak, falling 38.5% to $450.1 million, resulting in a book-to-bill ratio of 0.80. Original equipment orders fell 66%, with orders falling everywhere except Australia. Operating margins increased by 60 basis points to 23.8%, with operating profits coming in at $134.4 million.

Le Tourneau

The acquisition of Le Tourneau added $110.9 million in sales. Bookings came in at $91.7 million, resulting in a book-to-bill ratio of 0.83. Operating profitability increased 40 basis points to 20.0%, with operating profits coming at $22.2 million.


The acquisition of IMM contributed $69.2 million in sales. Bookings were relatively strong coming in at $64.6 million, for a book-to-bill ratio of 0.93. Operating profits coming in at $10.5 million, for an operating margin of 15.2%.


CEO Sutherlin commented on the future prospects, "The outlook for our business has continued to decline over the past quarter." Sutherlin noted that the US market progressed in line with expectations, while deceleration of demand in China has deteriorated more quickly and severely than previously expected.

Joy Global is consequently lowering its full year revenue outlook by $100 million. Full year revenues are expected to come between $5.45-$5.55 billion. Analysts expected the company to guide for annual revenues of $5.54 billion.

Full year diluted earnings per share are expected to come in between $7.05-$7.20, before restructuring charges. This compares to analysts consensus of $7.13 per share. In May, the company had forecast earnings of $7.15-$7.45 per share.

The company anticipates that cost reduction actions will accelerate in the fourth quarter, and save up to $40 million per annum. Including $20 million restructuring charges in the fourth quarter, full year earnings are expected to come in between $6.92 and $7.07.


Joy Global ended its third quarter with $454 million in cash and equivalents. It operates with short- and long-term debt of $1.62 billion, for a net debt position of $1.17 billion.

For the first nine months of its fiscal year, Joy Global reported revenues of $4.07 billion. The company net earned $549 million, or $5.19 per diluted share. Currently, the market values the firm at $5.6 billion. This values the firm at 1.0 times annual revenues and at 7-8 times annual earnings. The valuation compares to a revenue multiple of 0.9 times for Caterpillar Inc. (NYSE:CAT). This competitor trades at roughly 9 times trailing annual earnings.

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

Investment Thesis

Year to date, shares of Joy Global trade with losses of roughly a third. Shares started the year around $75 and quickly rallied to $95 in February. The re-emergence of the European debt crisis and a slowdown in China sent shares to lows of $50 in the summer months. Shares are currently trading at around $53 per share.

Five years ago, shares traded around the $50 mark. Shares fell to lows of $20 during the crisis in early 2009, but peaked at $100 in 2011. Between 2008 and today, Joy Global expanded its annual revenues from $3.4 billion to an estimated $5.5 billion in 2012. Net profits doubled from $375 million in 2008, to an expected $750 million in 2012. Annual dividends rose from $0.62 per share in 2008 to $0.70 in 2012.

Investors in Joy Global have seen a rough year so far in 2012, but historically are used to some volatility. While shares trade unchanged compared to last year, revenues and profits expanded significantly over time. With the acquisition of IMM and Le Tourneau made in the good years, investors could expect some goodwill impairments, possibly in the near term.

Valuation multiples are now appealing, and long-term investors with a tolerance for high volatility could pick up some shares for the long run.

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.