While it's hardly news that investors have sold all manner of heavy industrial OEMs as 2012 has progressed, and Joy Global (NYSE:JOY) has been hit a litter harder than most. Without the offsetting construction or agriculture businesses of Caterpillar (NYSE:CAT) or Deere (NYSE:DE), or the industrial compressor business of Atlas Copco (OTC:ATLKY), Joy Global shares have had a tough year. Although this large mining concern ended its fiscal year on a relatively positive note and valuation is not particularly demanding, these shares figure to be more volatile than average as investors guess about the timing of the eventual coal recovery.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Beating the Street to Close the Year
Even with all of the much-reported problems in the coal sector in the United States this year, Joy Global still closed the year on a strong note as residual business flowed through.

Revenue rose 19% from last year, with organic revenue growth of about 15% on an annual basis. Underground performance was definitely weaker (up 4%) on declines in Appalachian coal, while surface revenue increased 35%. Not too surprisingly, the China-focused IMM business saw a 25% sequential decline in revenue.

While Joy Global did seem to experience some diseconomies of scale, the overall operating performance wasn't bad. Gross margin did slip about 70 basis points (BPS) from last year and 120 BPS from the third quarter on a reported basis, while operating income rose 10% from the year-ago level. Margins were notably weak in the IMM unit, while surface equipment margins held up quite well (up 180 BPS from last year and down 10 BPS sequentially). Underground operating margin fell 240 BPS from last year and 110 BPS from the prior quarter.

SEE: Analyzing Operating Margins

A Quick Turn Seems Unlikely
I would characterize Joy Global's management as "cautious" with respect to guidance, but reasonably so. Bookings fell 9% on an organic year-over-year basis, or about 5% on a reported basis, with a particular weakness in underground mining machinery (down 10%). That works out to a 0.5 book-to-bill ratio, and the backlog fell about 21% from the same point last year (and 10% from the third quarter).

Relative to what investors have heard lately from Caterpillar, Atlas Copco and Boart Longyear (OTC:BOARF), it's hard to call anything in Joy Global's guidance surprising. Revenue guidance calls for a 10% decline next year, but it's a pretty small revision relative to where analysts were before this report. While the margin guidance implied that the lower EPS numbers is a little disappointing, it too is no real surprise given potential volume declines.

Investors are right to wonder just how quickly the coal markets might recover, as that is still the biggest determinant of Joy Global's demand and success. Recent increases in natural gas prices have helped the Powder River Basin and Illinois Basin coal producers, but a recovery in Appalachian coal seems less likely in the short term. What's more, large producers are likely to play it cautious with big order commitments, while smaller miners may not be able to get the financing they need to make big capex commitments.

SEE: A Primer On Coal

The Bottom Line
With General Electric (NYSE:GE) showing more interest in mining lately, it's hard to say that the game of musical chairs in the mining sector is over. I would be a little surprised to see GE have a go at Joy Global, but I also wouldn't completely dismiss it. Likewise, companies like Atlas Copco, Metso, Sandvik and Outotec could be looking at adjusting their exposure to mining either through acquisitions or disposals. Even if no further deals take place, I think Joy Global will recover, though there likely needs to be a multi-year adjustment to the new realities governing Appalachian coal mining in the U.S.

I'm somewhat ambivalent about Joy Global shares at these levels. While I do think the stock will recover in time, the uncertainty about coal demand in 2013, 2014 and 2015 could make this a turbulent holding. Accordingly, I'd probably look instead at Atlas Copco or Titan International (NYSE:TWI) right now.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  10. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center