Joy Global: Where's the Bottom?

04/03/2014 4:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The latest news, coming out of an interview, makes MoneyShow's Jim Jubak question whether or not he is currently, or if he ever will, see a bottom for this mining equipment supply company's stock, and what will happen if or when he does.

I keep looking for the bottom on Joy Global (JOY) and I’m still not convinced I’ve found it. (Joy Global is a member of my Jubak Picks 50 long-term portfolio.)

I’d like to find that bottom—or something close to it. The mining equipment maker will move up really strongly on any recovery in the mining sector. When mining companies stop cutting budgets and start ordering new equipment, Joy Global will be a big winner. Especially, because in order to survive this painful downturn, the company has cut costs and found efficiencies that will lead to big increases in profit margins once sales pick up again.

The latest news to make me wonder if the stock has hit a bottom came out in an interview that the CEO of Royal Dutch Shell (RDS) gave to the Financial Times yesterday, April 1. CEO Ben Van Beurden said that in an effort to make a profit in the company’s North American operations, the company had launched “Project Mosaic” to cut costs in its North American shale operations, by sourcing more equipment from cheaper Asian suppliers.

Royal Dutch Shell isn’t alone—companies across the natural resources sector are facing big pressure from shareholders to cut costs and capital spending budgets to make up for falling commodity prices. Iron mining giant Rio Tinto (RIO) reports that it bought $2 billion of Chinese equipment in 2013.

The consensus right now is Joy Global will see a huge drop in earnings per share for the fiscal year that ends in October 2014 to $3.26, from $5.83 in fiscal 2013, but that earnings will start to pick up in fiscal 2015 to $3.78 a share.

I think that analysts have the direction of company earnings right; it’s the timing that I continue to question. If that turn in earnings looks delayed—if the pickup now projected for fiscal 2015 looks likely to take longer—then the stock could retreat toward its February 3 low at $51.72 again.

That’s a big worry, in my opinion, because shares closed at $59.09 yesterday, April 2. So, a retreat back to the February low represents a loss of 12.5%. That’s not a huge loss, but the upside from today’s levels isn’t terribly attractive in comparison. Standard & Poor’s, for example, puts a target of just $58 a share on the stock.

The company reports earnings next on May 29. I’ll be looking to see what the company says to follow on its positive conference call comments in March about the copper and coal sectors. I’ll listen carefully to see if the company reports another double-digit drop in new orders. And I’ll want to see if margins, which fell by 11% in fiscal 2013, have stabilized.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Joy Global as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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