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Joy Global vs. Caterpillar: Which Offers Better Value?

Simplicity and necessity are the two primary criteria I evaluate to determine whether a prospective investment deserves a deeper look. When you have a company that is both simple (i.e. you understand how it functions) and whose function is necessary for society, half the decision of whether or not you should invest is already made. This set of criteria is what initially drew me to look at shares of Joy Global (NYSE: JOY  ) , a manufacturer and servicer of mining equipment used for the extraction of natural resources like iron ore and coal.

With a market capitalization of $5.45 billion, Joy Global is fairly large but far from blue-chip status. Because of this, the company has seen some rather attractive growth over the past few years, growing its revenue by 65.6% from the end of its 2008 fiscal year through its 2012 fiscal year. Over the same time horizon, its net income has grown even more, rising 103.6% from $374.3 million in 2008 to $762 million in 2012. This alone should be appealing to some investors, but the deal is further sweetened when one considers that the company is trading at a paltry 7.1 times its 2012 earnings, especially while the S&P 500 is trading at 19.4 times.

Joy Global vs. Caterpillar
On top of having a history of growth and trading at a very low multiple, Joy Global has something else going for it: attractive margins. The five-year average net profit margin for the company is 12.8%, compared to the 6.6% net profit margin of Caterpillar (NYSE: CAT  ) , its competitor with a $55.4 billion market capitalization. Whereas there has been a general but fairly inconsistent improvement in Caterpillar's net profit margin over the past five years, Joy Global has posted more consistent levels of improvement as can be seen in the table below:

Table by author; data from MSN Money

Although the factors behind these numbers are numerous, the primary contributor fueling Joy Global's superior net profit margin is its cost of goods sold as a percentage of revenue.

Table by author; data from MSN Money

In essence, the primary driver behind the company's superior profitability appears to be its ability to reduce costs at a very high level, which is advantageous.

In addition to beating out its largest publicly traded competitor in regard to its net profit margin, Joy Global's balance sheet is more attractive as well. As of its most recent fiscal quarter, the company had a current ratio of 2.03 compared to Caterpillar's 1.36. What this means is that, for each dollar in liabilities that Joy Global owes in the near future, it has $2.03 in assets that can likely be converted easily into cash in the near future.

The metrics of both companies indicate that they probably won't have any problems paying off what they owe in the short term, but what about what they owe in the long term? Well, looking at the long-term debt to equity ratios of both players, we see that Joy Global's metric of 0.42 is far better than the 1.46 sported by Caterpillar. Put simply, for every dollar in assets after subtracting liabilities that Joy Global has, it has only $0.42 in long-term debt. In juxtaposition, Caterpillar has $1.46 in long-term debt for each dollar in assets less liabilities. Generally speaking, this doesn't mean that Caterpillar will go bankrupt tomorrow. Rather, it suggests that if times become challenging for the industry, Joy Global will be better able to cope with its debt load than Caterpillar after keeping all else the same.

Foolish takeaway
Based on a purely fundamental perspective, it appears as though Joy Global is the better company to play out of the two. Not only is it healthy, it's also cheaper than Caterpillar, which is trading at 13.45 times earnings. The biggest downside to the company involves its exposure to China -- about 18% of sales is derived there. As such, any substantial decline in the Chinese economy would likely impair the company's earnings significantly. However, if you believe that China's slump is temporary, then Joy Global's prospects should appeal particularly solid to you.

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Related Tickers

9/23/2016 4:01 PM
JOY $27.59 Down -0.14 -0.50%
Joy Global CAPS Rating: ***
CAT $82.44 Down -1.06 -1.27%
Caterpillar CAPS Rating: ***