Between the cautious comments from companies like Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI), the economic and company reports coming from China and the worsening conditions in the mining sector, there's really no doubt left that the market for mining machinery has slowed. Joy Global (NYSE:JOY) echoed that, as solid second quarter results were overshadowed by lower guidance. Now the question is no longer about when Joy Global will see the slowdown, but how deep it will be and how long it will last.
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Good Today, Worse Tomorrow for Earnings
Not that it will impress forward-looking Wall Street, but Joy Global did at least post a solid fiscal second quarter result. Revenue rose 45% from last year on a reported basis, and 36% from the prior quarter. On an organic comparison, the year-over-year growth was 24%. By category, sales of underground equipment rose more than 23%, while surface equipment sales rose 27%.
Margins were also better than sell-side analysts' forecast. Gross margin did decline from last year (by two points), but improved more than a point from the prior quarter. Operating income rose more than 42% as reported, with both operating margin and incremental operating margin coming in pretty strong.
The elephant in the room for the second quarter results, though, is the bookings figure and its resulting impact on management guidance. Bookings dropped 34% from last year and 25% sequentially, with OEM orders down an even worse 59%. Management isn't expecting a quick recovery either and that has led them to reduce full-year earnings guidance by about 5%.
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Chinese Problems Are Probably Temporary, but what about U.S. Coal?
With Chinese mining equipment company Sany talking about equipment demand actually turning negative, it's pretty clear that the Chinese market has taken a real turn for the worse. That has to be kept in context, though, as most parts of China's economy are looking softer right now. Given China's needs just in terms of coal, it's hard to see Chinese machinery demand staying weak on a prolonged basis unless the global economy gets really ugly.
The bigger question for United States investors is the outlook for the U.S. coal market. About 30% of Joy's business is U.S. coal, and the large majority of that is underground coal machinery. Underground operators like Alpha Natural (NYSE:ANR) and Patriot Coal (NYSE:PCX) are definitely struggling right now, and even if utility coal demand recovers it's increasingly clear that the government (or at least the current administration) is not pro-underground mining.
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Does GE Lend Long-Term Credibility to the Market and Stock?
I find it interesting that General Electric (NYSE:GE) is following up its extensive acquisitions and investments in energy services with new moves into the mining market. GE may not be a perfect allocator of capital, but it's hard to imagine that GE made the decision to commit capital without weighing both the short-term risks and long-term opportunities in the mining sector.
In the short run, then, companies like Sany, Metso, Joy Global and Boart Longyear are going to have a tough go of it with their mining businesses. Longer term, the world still needs coal, copper and so on and that should fuel ongoing demand even if not at the same rate as recent years. Likewise, if GE is really serious about playing in the mining space, a deal for Joy Global could make sense at some point.
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The Bottom Line
Joy Global may not be all that expensive today on a long-term basis, but it's hard to see how the stock is going to outperform in the midst of this slowdown. What's more, these cyclical industry corrections have a way of being worse than initially expected, so that "long term" could end up being annoyingly long.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.