Update Joy Global (JOYG)
03/07/2011 2:21 pm EST
Apparently investors temporarily forgot that Joy Global’s (JOYG) fiscal first quarter is always the worst of the year for the mining equipment maker. So when on March 2 the company announced a mere 19% increase in sales from the first quarter of fiscal 2010 and a jump in net income to 96 cents a share from 73 cents a share in the year earlier period (that’s 32% growth if you’re following along at home), the shares dropped 2.9% to $94.32 from $97.17. The next day investors reconsidered and the shares closed at $97.33.
The key number to look at in Joy Global’s quarterly results is always bookings. Is the company adding new orders faster than it did in the same quarter a year ago and in the immediately preceding quarter? This quarter the answer was Yes to both these questions. Bookings in the fiscal first quarter climbed by 52% from the first quarter of fiscal 2010 to $1.2 billion. (That’s a cushion of slightly more than the quarter’s $870 million in sales.) Bookings also climbed 18% from the fourth quarter of fiscal 2010. That’s a sign that the company’s momentum isn’t slowing. (It’s always good when your weakest quarter beats the previous quarter.)
With Joy Global (by the way the stock is a member of my Jubak Picks 50 long term portfolio http://jubakpicks.com// ) an investor wants to check the mix of original equipment to after market orders. Original equipment orders—orders for new machinery—tell you whether the very cyclical mining industry is still in an expansion phase and still buying. Original equipment orders were up $327 million in the quarter from the first quarter of fiscal 2010. The big increase in demand came from Australia and the United States. I think it’s safe to say that the mining industry is still in a spending mood. (The company noted that it saw the first orders for new surface equipment from Indian miners in several years this quarter.)
After market orders are for parts and rebuilding of existing machinery. Think of it as the revenue stream that follows from the sale of that original machine. As such it’s a kind of annuity that can help smooth out the worst of the mining industry cycles for Joy Global. Even when the industry stops expanding and stops buying new machines, it still keeps buying parts—unless the downturn is really, really nasty. Aftermarket orders in the underground mining sector climbed by $21 million from the first quarter of fiscal 2010 and in the surface mining sector by $76 million. In total aftermarket order backlog grew by $54 million or about 60%.
The next thing to look at in the current environment is margins. Thanks to rising raw materials prices, costs are rising for all manufacturing companies and investors want to know if a company such as Joy Global has enough pricing power to pass those along to customers. The news here looks good too. Operating margins rose to 17.7% in the quarter from 16.1%. The company’s projections for the rest of fiscal 2011 work out to even higher margins for the rest of the year. Most of the company’s original equipment orders include clauses that allow automatic price increases if Joy Global’s costs go up.
Last question, of course, is what all this good news is worth going forward.
That largely depends on how long this expansionary part of the mining industry cycle has to run. The capital spending budgets I’m seeing from mining companies say big increases through 2015 with capital spending forecast to increase by 20% in 2011. Budgets are only budgets, however, and they’re easy to cut if commodity prices fall or demand slackens. But the company didn’t see demand falling anytime soon in its earnings guidance. For example, in its guidance Joy Global forecast demand growth in steel—and hence for iron ore and metallurgical coal in 2011. Supply for those two commodities should stay tight—meaning higher prices—for the five to six years it takes to complete a project, the company forecast. In the United States 22 gigawatts of new coal-fired power plants are scheduled to come on line by 2012. Increasing oil prices will drive expansion in Canada’s oil sands with delayed projects getting reactivated in 2011. Copper supply is expected to trail copper demand by 500 million metric tons in 2011.
On March 4 the shares traded at 18.3 times projected fiscal 2011 earnings per share. That’s below the 21% forecast increase in earnings per share so Joy Global doesn’t seem unreasonably expensive—yet.
Standard & Poor’s calculates a $110 target price on the stock. At the current $96.20 that works out to a gain of 14% in a year. To call this a buy you have to believe either that the consensus forecast of $5.32 a share in earnings is too low or pick up the shares on a dip below $92. I love a dip as much as the next investor—and the stock did trade at $85.35 on January 28—but I do also believe that the consensus is low. I’d put a one-year target price of $114 on the stock.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Joy Global as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/