Bad News Is Good Enough for Joy Global
09/01/2011 4:11 pm EST
In another market worried about other things, Joy Global (JOYG) shares would probably have tumbled yesterday. However, the shares closed up 1.3%, after being up as much as 4.8% during the day.
And that performance carried shares of competitors higher too. Shares of Caterpillar (CAT) were up 2.9%.
Before the stock market opened on August 31, Joy Global announced fiscal third-quarter results that beat on earnings—$1.61 a share, 7 cents above analyst projections—but fell short on revenue. Revenue climbed 34% from the third quarter of 2010, to $1.14 billion. That was below the $1.21 billion consensus.
And then the company issued tepid guidance for the rest of fiscal 2011. (The company’s fiscal year ends in September.) Earnings, the company said, would be $5.70 to $6 a share (compared with the current consensus estimate of $5.78 a share); revenue would be $4.3 billion to $4.5 billion, versus the current $4.58 billion consensus.
In a normal market, that kind of revenue miss followed by guidance below expectations would earn a stock at least a brief spanking. But in a market worried that global economic growth—and demand for commodities—is about to drop off a cliff, Joy Global’s third-quarter report was great news:
- The company, which makes mining equipment, reported that its backlog rose to $3.2 billion at the end of the quarter, compared to $1.8 billion at the beginning of the fiscal year in September 2010.
- Third-quarter bookings increased 49%, to $1.4 billion.
- The book-to-bill ratio, a measure of how many new orders are coming in to replace those that the company has filled, was a solid 1.3.
If global growth was about to go into a nosedive, Joy Global will be one of the first companies to report the plunge in altitude. Instead, the company is saying, yes, “there is increasing evidence that slowing is underway in economies worldwide,” but that its customers in the global mining sector are still buying equipment so they can expand production to meet future demand.
In its third-quarter earnings announcement, the company said, “Our strong bookings this quarter indicate that the industry fundamentals remain intact. This is further supported by our growing list of qualified order prospects, as customers continue to move mine expansion projects forward.”
In other words, global growth may be slowing, but so far Joy Global’s customers—who have very long-range capital-spending plans—are acting as if the slowdown won’t last long enough to make canceling orders prudent. That was enough in the current quarter to take operating margins up to 23%.
“Prudently” is a good way to approach this stock right now. Fears of a severe global economic slowdown haven’t gone away...and every time they resurface, they’ll bite these shares.
I think $92 a share is a reasonable one-year target price for Joy Global. That means I’d look to buy shares whenever they drop below $80. The recent low (on August 22) was $69.45.
As of September 1, I’m adding these shares to Jim’s Watch List.
Full disclosure: I don’t own shares of any stock 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 June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.