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. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  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 >>

You May Also Like

Trading Center