This Stock Is Guaranteed to Bring Joy to Your Portfolio

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The headlines today all read that commodities are in a crunch. Copper is getting killed, oil is as low as it's been in more than a year, and with threats of global recession, what are we going to do? I tell you what I'm gonna do: I'm adding Joy Global (Nasdaq: JOYG  ) to my Rising Star portfolio.

The company
Joy Global was technically founded in 1884 as Harnischfeger Industries. However, when Harnischfeger filed for bankruptcy in 1999, Joy Global emerged as the direct successor company with a global focus on underground mining and surface mining equipment. Today the company operates in two segments: P&H Mining Equipment (surface mining equipment) and Joy Mining Machinery (underground mining machinery).

P&H is the world's largest producer of electric mining shovels, and Joy Mining is the world's largest producer of underground mining machinery for the extraction of coal and other materials. While the company's products are used for mining a number of materials, more than two-thirds of revenues come from their coal-mining customers. Given that more than 40% of total revenue comes from outside the U.S. and Europe, I smell an opportunity of global proportions.

Oh the Joy!
The International Energy Outlook 2011 predicts that through 2035, coal consumption for Organization for Economic Co-operation and Development nations will remain essentially flat. However, non-OECD nations (like China and India) are another story; projections there are for coal consumption growth of 76%. Furthermore, from 2008 to 2035, coal is projected to account for more than one-third of total non-OECD energy consumption. Below is a graph charting estimates for non-OECD consumption by region:

India and China both continue to import more thermal and metallurgical coal as well thanks to continued development and significant infrastructure programs in both countries' next five-year plans.

Joy's recent acquisition of LeTourneau from Rowan Cos. (NYSE: RDC  ) along with additional market share gains from the strategic investment in International Mining Machinery Holdings in China should also add some fuel to the fire.

Just as emerging economies are stoking demand for coal, copper is another commodity that plays a big part in energy and infrastructure upgrades. While copper plays a smaller role in Joy's overall revenue (to the tune of about 15% annually) management believes it will continue to see double-digit growth in the near term as mining companies are realizing strong demand and prices. The table below represents the capital expenditure trends for three global mining operations over the past three years. It is also worth noting that all three have guided for increased capital expenditure spending going forward as well:

 

TTM

2010

2009

Freeport-McMoRan (NYSE: FCX  ) $1,917.0 $1,412.0 $1,587.0
BHP Billiton (NYSE: BHP  ) $12,387.0 $10,656.0 $10,735.0
Rio Tinto (NYSE: RIO  ) $7,908.0 $4,591.0 $5,388.0

Why there would be no joy in Foolville
It's plain to see that there are plenty of risks inherent with investing in a company like Joy Global and there a few things we'll need to keep our eyes on:

What recovery?: As the global economy continues to teeter on the edge of recession, the rest of the world remains inextricably tied to the fate of countries such as Greece, Spain, and Italy. While I like Joy's exposure to non-OECD countries, the tangential effects of any kind of meltdown will play out in the commodities market and more than likely crimp Joy's backlog for the short term.

More specifically: One of Joy's strengths could also be a weakness if global demand for coal fails to materialize. Any significant drop in demand or uptick in environmental issues could leave a black mark that may be tough to get rid of.

Big dog (or Cat): Joy has a tremendous global reach and a balance sheet that affords some genuine opportunities like the LeTourneau and IMM deals. However, Caterpillar (NYSE: CAT  ) is a major player in this area as well, and given the size advantage it could pose some pricing problems for Joy down the road.

Diamonds in disguise?
Joy has grown top-line revenue at 12% annually over the past decade, and as it continues to leverage costs, operating margins should continue to average above 20%. Granted the business is susceptible to overall global conditions, but I think the long-term picture is still attractive and if it is able to grow the top line at around 7% or so over the next decade we're looking at a stock that is worth closer to $80 than the $58 it trades for today. The market is pricing in a pretty dismal scenario, and that may be fair for the short term. As a long-term holding though I think we're getting a real winner (and a market-spanker over the last five years) at an excellent price, and I'm willing to wait out the storm.

My Foolish bottom line
This market has everybody spooked and there's no telling what's around the corner. What's the next shoe to drop? True to my Foolish ways, I gotta keep investing in good times and in bad. And while Joy Global may very well fall further in the volatility that is the market these days, I've deemed it worthy of a 6% ($1,000) position in my portfolio today. Make sure to drop on by my discussion board and let me know what you think.

Stock Advisor analyst Jason Moser owns no shares of companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 2:47 PM, MHedgeFundTrader wrote:

    I am bailing on my long position in the Caterpillar (CAT) January, 2012 $110 calls. I think there is a snowball’s chance in hell that the stock will make it back above $110 or more by the January 21 expiration. Therefore, I have to salvage whatever time premium I can before it goes to money heaven. In fact, it might even be worth going short a few of these calls, if your inclination is to pick up pennies in front of the bulldozer.

    I went into this trade with all the best intentions. I still love the company fundamentals for the long term, as its sales are still rising at well into double digit rates. But if there are fears of a slowdown in China, this is definitely a stock you do not want to own. Caterpillar shares also got blindsided by the meltdown in copper, which pared a stunning 35% off its yearly high in a heartbeat.

    I also turfed this out of my trading book because, quite frankly, I was getting sick of looking at it. This trade was leftover from July, when we were living in a distant, more equity friendly world. This was before the Tea Party threatened a Treasury bond default, and Standard & Poor’s downgraded them anyway, triggering the current collapse in confidence.

    Chalk it all up to a lesson on the value of using limited risk positions to control your risk in a trading book. My loss on this trade came to 4.81% of the total portfolio value. The options capped my maximum loss at 5%. Stop losses also showed their worth, which I woefully ignored in this case, much to my own expense.

    I don’t like being reminded of my mistakes any more than the next guy, so it is hasta la vista, baby, to the Caterpillar calls. I live in a world of instant gratification, so it is on to the next one. Anyway, with 18 consecutive profitable trades under my belt over the past two months, I am now well ahead of the curve.

    I do make mistakes. For the perfect track record you have to go to that other more expensive mentoring service down the street with the flashing neon lights and those aggressive, sexy touts offering the perfect track record. By the way, that track record is fake.

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JOY $47.07 Up +0.56 +1.20%
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