Joy Global - Again No Joy For Investors

| About: Joy Global (JOY)

Shareholders in Joy Global (NYSE:JOY) have taken another hit. The global provider of mining equipment has reported strong third quarter results. Yet the disappointing outlook for the fiscal year of 2014 put renewed pressure on shares.

The long-term prospects remain good and it might be time for investors to go bottom fishing in the coming days or weeks.

Third Quarter Results

Joy Global generated third quarter revenues of $1.32 billion, down 4.9% on the year before. Revenues came in ahead of consensus estimates of $1.18 billion.

Operating earnings came in at $274.3 million, as operating margins fell by 80 basis points to 20.8% of total sales. Income attributable to shareholders fell by 5.8% to $183.2 million resulting in earnings per share of $1.71.

Adjusted earnings per share came in at $1.70 per share, ahead of consensus estimates of $1.37 per share.

While the current results are reasonably good, the bookings for the immediate future are outright terrible. Total bookings fell by an unprecedented 35.9% to just $695.4 million, resulting in a book-to-bill ratio of just 0.53.

CEO Mike Sutherline commented on the performance, "Once again, the quarter's results demonstrate strong operational efficiencies and weak market conditions. The market has become even more challenging, with declines in order rates for both original equipment and aftermarket. The supply surplus that was centered in the U.S. coal market last year has migrated to the international markets, and they are now going through similar aftermarket corrections to that in the U.S."

Looking Into The Results..

Joy reported revenue declines across both divisions. Underground Mining Machinery revenues fell by 4.2% to $722.7 million, while Surface Mining Equipment revenues fell by 5.1% to $640.9 million.

Profitability of the Underground Mining Machinery unit fell to 19.5% of total sales, down 360 basis points on the year before. Surface Mining Equipment operating profits rose by 150 basis points to 24.7% of total revenues.

The poor bookings promise not much good for the future. Aftermarket bookings fell by 13.2% to $599.1 million. The market for original equipment has been outright terrible, as bookings fell by 75.5% to $96.3 million.

..And Into The Immediate Outlook

The surplus supply conditions for most mined commodities puts pressure on Joy's operations. Lower prices in crucial commodities have made some mines uneconomic and will result in mine closures to find a renewed balance, putting pressure on Joy's business.

Improvements in the prospects will not impact Joy's order rate significantly in 2014, even if a current recovery would materialize. As such the market conditions remain challenging for some time to come.

Given the current outcomes, Joy does not see annual revenues above $4 billion going forward into the new year. For this year, Joy reiterates its full-year earnings target of $5.60 to $5.80 per share, on revenues of $4.9 to $5.0 billion.

Full-year adjusted earnings per share are seen between $5.75 and $5.95, in line with consensus estimates of $5.84 per share on revenues of $4.94 billion.

Previously, Joy guided for annual adjusted earnings per share between $5.75 and $6.35 on revenues between $4.9 and $5.2 billion.


Joy ended its third quarter with $486.0 million in cash and equivalents. The company operates with $1.33 billion in total debt, for a net debt position of around $850 million.

Revenues for the first nine months of this year came in at $3.83 billion, down 5.8% on the year before. Net earnings fell by 7.8% to $506.9 million, as earnings per share came in at $4.73.

Factoring in a 4% decline in Joy's share price following the release, the market values Joy at $5.2 billion. This values Joy's operations at little over 1.0 times annual revenues and 8-9 times annual earnings.

Joy Global currently pays a quarterly dividend of $0.175 per share, for an annual dividend yield of 1.4%.

Some Historical Perspective

Very long-term investors in Joy have seen fabulous returns. Shares have risen from merely $5 in 2003 to highs around $80 in 2008. Shares fell all the way to their mid-teens during the financial crisis of 2009 to rise to highs of $100 in 2012.

From those levels, shares have lost roughly half their value again, currently exchanging hands at $49 per share.

Between 2009 and 2012, Joy Global has increased its annual revenues by a cumulative 57% to $5.67 billion. Net earnings rose by two-thirds to $762 million. Both revenues as well as earnings will fall for the current fiscal year.

Investment Thesis

While Joy Global reported decent earnings for the third quarter, the fourth quarter and start of the fiscal year 2014 will be dismal. Global oversupply, notably in the important coal market from which Joy derives two-thirds of its revenues, resulted in a 36% decline in bookings.

To mitigate the impact of the adverse developments, Joy is stepping up its cost control efforts. Joy started with cost cuts in 2012, but has embarked on a second and third program as revenues could fall by another 20% next year.

The Phase 1 efforts will result in $47 million in annual savings, ahead of the $40 million target. The Phase 2 restructuring started in 2013 and will result in another $65 million in savings in 2014, ahead of expectations of $40 million. The third phase should cut costs by another $15 million in the coming years, keeping earnings somewhat in check amidst the revenue declines.

Important and large coal producers, including Peabody Energy (NYSE:BTU) are cutting on mining equipment capital expenditures. As a result, the backlog fell to just $1.6 billion over the past quarter, representing little over 4 months work at current production levels.

While these factors should impact the immediate prospects for competitor Caterpillar (NYSE:CAT) as well, shares of the Peoria based company were trading largely unchanged.

So while the prospects look bleak, it might be time to go bottom fishing. Even at an annual revenue rate of $4 billion, Joy should be able to earn between $300 and $500 million. Given the strong financial position, Joy actually sends a powerful message itself. The board has authorized a new $1 billion share buyback program, to be executed in the coming 36 months. This would be sufficient to retire about a fifth of the outstanding share base.

While the outlook for the current six to twelve months will be weak, the current valuation is already reflecting this. Given the strong balance sheet and profitable operations, even at lower activity levels, there is no need to panic. Long-term investors might pick up a few shares in the $45-$50 range and wait for better times.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Farm & Construction Machinery, Earnings
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here