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Joy Global: Minerals Or Machines?
It is interesting to see that Joy Global (Nasdaq:JOYG), one of the world's leader manufacturers of mining equipment, is still trading at historically healthy multiples while many leading miners like Vale (Nasdaq:VALE) and Freeport McMoRan (NYSE:FCX) have been a little weaker. Then again, with long lead times for new equipment and fewer vendors to choose from (especially now with the Caterpillar (NYSE:CAT) acquisition of Bucyrus), it makes a certain amount of sense that Joy Global would be seen as the more stable, longer-term play.
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A Solid Second Quarter
Joy Global rebounded from a disappointing fiscal first quarter with a strong performance this time around. Revenue rose 19% and though it did not top the very highest analyst estimates, it was still a fair bit stronger than the middle of the range. Revenue growth was also relatively balanced; original equipment sales were up 10%, while aftermarket was up 24%. Growth was also split nicely between underground and surface; up 19% and 15% respectively, with underground still representing more than half the total business.
With stronger aftermarket equipment sales, it was not surprising to see stronger margins at Joy Global. The company picked up some momentum on the gross margin line and ultimately saw operating margin expand almost two points as operating income increased nearly 30% from the year-ago level.
Order growth was also strong, as the company saw bookings rise 46%. OEM orders were especially strong (up 79%) and though that may lead some investors to worry about future margins, aftermarket orders tend to have longer lead times so it has harder to draw direct lines between today's orders and the next quarter or two's margins.
LeTourneau on Track
There was not too much new information on the LeTourneau deal. At this point, little-to-no news is probably good news, and the company and Rowan (NYSE:RDC) should finish this transaction in the next quarter. This is a good move for Joy Global from the perspective of both diversification and competition with Caterpillar. It might also be worth wondering, though, whether the company would consider additional deals - say like the acquisition of International Mining Machinery, China's leading mining equipment company - to expand into particular regional markets.
High Prices, High Capex
Plenty of investors and writers spend their time speculating and arguing about whether copper prices are too high, gold prices are in a bubble, and if aluminum is ever going to be worth an investor's attention, to say nothing of the forward trajectory of rare earth prices. From the perspective of a Joy Global investor, it is probably enough to know that current prices are more than sufficient to coax mining companies into opening or expanding their portfolio of sites.
While it is true that a sharp drop in prices might lead companies to delay further capex commitments, the reality is that companies like Vale, BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Xstrata and Peabody (NYSE:BTU) are not going to stop cold. The world needs more coal, copper and iron and that makes equipment purchases a "when" not "if" question. True, it is probable that the world will reach a point where new production absorbs the new demand and the cycle goes back into decline, but that does not seem too likely in the next few years. In fact, companies like Vale, BHP and Rio Tinto look poised to spend billions (with a "b") in just the next two years alone.
The Bottom Line
Right now the mining companies look cheaper than the equipment players like Joy Global, and in some cases the valuation discrepancies are striking. However, Joy Global is the more stable play and is not going to get bounced around to the same extent by transient moves in commodity prices. Overall, Joy Global is a less of a bargain, but individual mining stocks offer a great deal more idiosyncratic risk. (For related reading, also take a look at Strike Gold With Junior Mining.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: 20 Investments To Know
A Solid Second Quarter
Joy Global rebounded from a disappointing fiscal first quarter with a strong performance this time around. Revenue rose 19% and though it did not top the very highest analyst estimates, it was still a fair bit stronger than the middle of the range. Revenue growth was also relatively balanced; original equipment sales were up 10%, while aftermarket was up 24%. Growth was also split nicely between underground and surface; up 19% and 15% respectively, with underground still representing more than half the total business.
With stronger aftermarket equipment sales, it was not surprising to see stronger margins at Joy Global. The company picked up some momentum on the gross margin line and ultimately saw operating margin expand almost two points as operating income increased nearly 30% from the year-ago level.
Order growth was also strong, as the company saw bookings rise 46%. OEM orders were especially strong (up 79%) and though that may lead some investors to worry about future margins, aftermarket orders tend to have longer lead times so it has harder to draw direct lines between today's orders and the next quarter or two's margins.
There was not too much new information on the LeTourneau deal. At this point, little-to-no news is probably good news, and the company and Rowan (NYSE:RDC) should finish this transaction in the next quarter. This is a good move for Joy Global from the perspective of both diversification and competition with Caterpillar. It might also be worth wondering, though, whether the company would consider additional deals - say like the acquisition of International Mining Machinery, China's leading mining equipment company - to expand into particular regional markets.
High Prices, High Capex
Plenty of investors and writers spend their time speculating and arguing about whether copper prices are too high, gold prices are in a bubble, and if aluminum is ever going to be worth an investor's attention, to say nothing of the forward trajectory of rare earth prices. From the perspective of a Joy Global investor, it is probably enough to know that current prices are more than sufficient to coax mining companies into opening or expanding their portfolio of sites.
While it is true that a sharp drop in prices might lead companies to delay further capex commitments, the reality is that companies like Vale, BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Xstrata and Peabody (NYSE:BTU) are not going to stop cold. The world needs more coal, copper and iron and that makes equipment purchases a "when" not "if" question. True, it is probable that the world will reach a point where new production absorbs the new demand and the cycle goes back into decline, but that does not seem too likely in the next few years. In fact, companies like Vale, BHP and Rio Tinto look poised to spend billions (with a "b") in just the next two years alone.
The Bottom Line
Right now the mining companies look cheaper than the equipment players like Joy Global, and in some cases the valuation discrepancies are striking. However, Joy Global is the more stable play and is not going to get bounced around to the same extent by transient moves in commodity prices. Overall, Joy Global is a less of a bargain, but individual mining stocks offer a great deal more idiosyncratic risk. (For related reading, also take a look at Strike Gold With Junior Mining.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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