No Joy At Joy Global - But Investors Should Focus On The Free Cash Flow

| About: Joy Global (JOY)
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In this article I'll have a closer look at Joy Global (NYSE:JOY) which just reported its Q4 and full year 2013 financial results. I will provide my view on the company's financial statements and its balance sheet. Thereafter I will look forward to next year, and this will result in my investment thesis at the end of this article.

My view on the financial results

In the fourth quarter which ended in October, Joy Global reported a revenue of $1.18B, which is a stunning 25.9% lower than in the same period last year. The operating income even plunged by in excess of 85%, but - in the company's defense- this was mainly caused by recording a $155.2M impairment charge. Without this non-recurring impairment, the operating income would have decreased by 'just' 38%.

Moving over to the bottom line, the net income attributable to Joy Global was just $26.8M or $0.26/share, which is a 87% decline from the EPS of $2.00 at the same period last year. For the full year 2013, the EPS came in at $5.03/share compared to $7.20/share in FY 2012.

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But as I mentioned in several previous articles, it's more useful to have a look at the cash flow statements instead of at the bottom line. This is definitely valid in this case, as the $155.2M impairment charge obviously is a non-cash write down and does not influence the cash flow profile of the company.

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So, when looking at the cash flow statements, we see Joy Global reported an operating cash flow of $195.4M, and invested just $35M in capex, which means the company actually had a free cash flow of approximately $160M, or $1.51/share which is approximately 500% higher than the EPS. For the entire year 2013, Joy Global reported a free cash flow of $486.8M, or $4.61/share. The majority of this cash flow was spent on dividend payments ($74.3M) and share repurchases ($214M).

My view on the balance sheet

Let's now move over to the company's balance sheet. At the end of FY 2013, Joy Global had a working capital position of $1.46B which is a $70M increase compared to the end of last year (despite spending almost $300M on dividends and share buybacks). The current ratio of Joy was a very healthy 2.08 (keep in mind a current ratio of higher than one means the company has sufficient current assets to cover its current liabilities).

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The book value per share increased to $27.18 compared to $24.29 at the end of last year, but investors should realize that in excess of 50% of the book value is being backed by goodwill and other intangible assets.


For FY 2014, the management team is guiding for a revenue of $3.6-3.8B and a net profit of $3-3.50/share, which means the company is currently trading at 15 times its 2014 earnings. This sounds expensive at first sight, but I would recommend to keep an eye on the cash flow statements instead of just looking at the net income, as the net income statements in 2013 were hiding that the company generated a very attractive cash flow stream.

Investment Thesis

Whilst I'm writing this, Joy Global is recovering a bit from the drop in its share price, and I think the market overreacted a bit. I agree with the view that a revenue and backlog decline is bad, but I'd like to emphasize that even in a horrible Q4 (which saw a revenue decline of 26%), Joy still generated $160M in free cash flow, and that's something which cannot be underestimated.

I'm actually looking forward to 2014 to see what amount of free cash flow Joy Global can generate and how the company will spend it. The dividend is absolutely safe, and I am expecting further share buybacks.

I might be interested to pick up some shares, but I'd first like to see some more details about the free cash flow generation in 2014, so for now I think I'll stick with writing a put option on JOY. At this moment, I specifically like the P45 July 2014 at $1.85. If I don't get the shares assigned by expiration day, I can keep the option premium in my pockets which results in an annualized return of 7%, which is quite decent.

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. I might write a put option as explained in the article.