Shares of Joy Global (NYSE:JOY), a manufacturer of mining equipment used to extract natural resources such as iron ore and coal, have rallied by 12% during October. Nonetheless, many investors continue to bet against the company: It has recently become the eighth most shorted company on the S&P 500 . Yet Joy Global still has a few strong points that make it a compelling investment. Let's take a close look at these points.
The slowdown in the mining industry has taken its toll on Joy Global. Its revenues have declined in 2013, and the company continues to cut down on its workforce . This trend is likely to persist into 2014.
Caterpillar's revenues have declined by 18.3% in the third quarter of 2013. The company has revised down its sales' outlook for 2013 from $56-$58 billion to $55 billion; for 2014 the company expects sales to remain flat. Cummins' revenues slightly rose by 4% in the third quarter but didn't meet the market expectations .
Cummins, much like Caterpillar, revised its outlook downward. It estimates its revenues will decline by 3% year over year in 2013, rather than remaining flat as previously estimated. In the first nine months of 2013, the company's revenues fell by 2.5%, suggesting the fourth quarter may show an even steeper drop in sales.
Let's turn to Joy Global and list the four reasons, which make this comapny an investment worth considering.
1. Profit margins remain high
As indicated in the chart below, Joy Global maintained profit margins higher than its competitors'.
The chart above shows that Joy Global's operating profit is nearly three times that of Caterpillar. Even if the company's profitability were to decline, it would still remain high for the industry. This high profitability also means high free cash flow.
2. Growth in free cash flow
Joy Global's free cash flow remained positive throughout the year. The company is close to fully fund its U.S. pension plans, which will allow it to cut down its pension funding by $115 million in fiscal 2014.
It also plans to halve its capital expenditure spending from 2012 to 2014, to $125 million a year. These steps are likely to free up more cash to maintain its stability and its share repurchase programs.
3. $1 billion share buyback
The positive free cash flow will allow Joy Global to buy back its shares in the market without increasing its debt. Currently, the company plans to repurchase $1 billion worth of shares in the next year and a half.
This is not only a good indication for the management's confidence in the company, but could also curb any potential drop in the stock price in the near future.
4. The price is right
Despite these positive attributes, the main question remains: Is the company's stock high? Let's turn to its current valuation.
Joy Global's enterprise value and its EV-to-EBITDA ratio were compared to Caterpillar, Cummins and the average Machinery industry. This will provide a back-of-the-envelope calculation for Joy Global's valuation.
The table below shows the summary of data.
Based on the above, Joy Global's EV-to-EBITDA ratio of only 6 is the lowest of the three companies, even falling below the industry average. In comparison, Caterpillar's EV-to- EBITDA ratio is 9.89, which is close to the industry average.
Considering Joy Global's financial stability, high profit margin, and share-repurchase program, the company presents an interesting opportunity. The heavy equipment industry still offer opportunities. Joy Global compensates for its lack of growth in sales with high profit margins, strong cash flow, financial stability, and low valuation. These factors should be taken into account if you're considering investing in this company.
Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. 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.