Why Joy Global Shareholders Aren’t Doing the Happy Dance

Shares of Joy Global (NYSE: JOY  ) hit a 52-week low on Wednesday. Let’s take a look at how it got there and see if cloudy skies are still in the forecast.

How it got here
While Joy Global’s name might inspire you to get out of your chair and do the Ren & Stimpy "Happy happy, joy joy" dance, its recent performance has inspired investors to, instead, hide under the covers.

Joy Global, a manufacturer and servicer of heavy-duty mining equipment, is suffering from myriad problems. Earlier this week, Cummins (NYSE: CMI  ) , the world’s leading heavy-duty engine manufacturer, drastically reduced its sales forecast due to tapering demand from the manufacturing sector (of which Joy Global is a part of). In the coal and copper sector, soft demand continues to take its toll, with Patriot Coal declaring bankruptcy, and Freeport-McMoRan Copper & Gold (NYSE: FCX  ) shipping about 100 million fewer pounds of copper in its latest quarter. All told, reduced mining demand in all forms threatens to take a big bite out of Joy Global’s bottom line.

However, you wouldn’t know that Joy has many concerns if you looked solely at its second-quarter earnings results. Sales rose 45%, while backlogs dipped modestly to $3.1 billion. However, as a heavy-duty machinery supplier to the coal and copper industry, it wouldn’t take much for a continued slowdown in coal, and a drop in copper prices, to knock Joy down even further.

How it stacks up
Let’s see how Joy Global stacks up next to its peers.

JOY Chart

JOY data by YCharts

Yuck! We knew things haven’t been easy for heavy duty machinery manufacturers but, aside from Deere (NYSE: DE  ) , which is essentially flat, both Joy Global and Caterpillar (NYSE: CAT  ) have had rough rides over the past five years.
 

Company

Price/ Book

Price/ Cash Flow

Forward P/E

5-Year Revenue CAGR

Joy Global 2.2 15.1 5.6 12.9%
Caterpillar 3.5 8 7.1 7.7%
Deere 4.2 21.9 8.7 7.7%
Source: Morningstar, author’s calculations, CAGR = compound annual growth rate.

The first thing you’ll notice is that there’s quite a lot of growth similarity when you compare all three heavy-duty machinery companies, yet they’re all on diverging paths.

Deere is the priciest of this grouping based on these metrics, but deservedly so. High crop prices and record farm yields in 2011, coupled with a warmer winter, have led to another strong year of demand for Deere’s farm equipment.

Caterpillar presents a mixed bag at the moment. It bridges both the construction sector that Deere will cater to, as well as the mining equipment sector that’s Joy’s bread and butter. News from Cummins that engine orders are slowing probably bodes poorly for Caterpillar, but don’t be quick to discount Cat’s impressive worldwide pricing power.

Joy Global may have the quickest growth rate, but that was highly dependent on rising commodity prices. With electric utilities choosing natural gas as opposed to coal in record numbers, and China’s economy slowing and using less copper, demand for Joy’s equipment could put a serious dent in those growth figures.

What’s next
Now for the $64,000 question: What’s next for Joy Global? That answer depends largely on what happens with copper and coal prices, if China can reinvigorate its growth, and if Europe can quickly get its act together so as to avoid a global recession.

Our very own CAPS community gives the company a four-star rating (out of five), with an overwhelming 97.6% of members expecting it to outperform. I’ve yet to personally make a CAPScall on Joy Global in either direction, and I’m apt to continue watching from the sidelines after yesterday’s warning from Cummins.

Joy Global appears fairly cheap based on its forward earnings estimates, and it’s clear that coal will remain vital for U.S. energy production for decades to come. It isn’t as if Joy’s demand is going to dry up overnight. However, it’s undeniable that coal prices are weak and, as long as China’s economy is slowing down, it will add pricing pressure to copper spot prices. This could deter copper miners from placing orders with Joy. For now, I’d rather take a wait-and-see approach and will revisit the company in three-to-six months.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Joy Global and Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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