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Today's Slump in Joy Global Shares Should Leave You Worried

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of mining-equipment maker Joy Global (NYSE: JOY  ) plunged more than 6% in afternoon trading after the company reported a horrendous fourth quarter and topped it up with an equally dismal outlook for 2014.

So what: While a 26% year-over-year drop in Joy Global's fourth-quarter revenue was still better than what analysts expected, the company sent shockwaves with a staggering 87% plunge in net income. Profits were still 47% lower year over year after excluding a one-time charge.

Worse yet, Joy Global's backlog value slipped 6% sequentially. That means the company's backlog value has slumped a whopping 42% for the full year. Since backlog serves as a pointer for a company's future potential revenue, it looks like Joy Global is in serious trouble here.

Now what: Joy Global's growth is closely tied to the commodity markets. Unfortunately, a supply glut and soft metal prices have forced major mining companies to put expansion plans on the back burner and cut back capital spending. A 19% drop in Joy Global's fourth-quarter bookings indicates that the end markets are only getting weaker.

Since Joy Global gets two-thirds of its revenue from mining customers, it'll be a turbulent ride. While Caterpillar (NYSE: CAT  ) projects flat to 5% lower revenue for 2014, Joy Global expects sales in 2014 to drop 24% even at the higher end of the range. While Caterpillar has an improving construction equipment and a strong power systems business to fall back on, Joy Global is largely at the mercy of the mining industry.

To deal with the situation, Joy Global plans to restructure its business in 2014 to reduce costs. That was expected, especially after Caterpillar's recent restructuring initiatives.

The only positive takeaway from the disastrous earnings report was Joy Global's free cash flow, which more than doubled to roughly $484 million for the full year. While that looks great, it's the result of lower capital expenditure and not higher income, as a prudent investor would want to see.

Investors may find Joy Global's $1 billion share repurchase program hopeful, but beware. In the absence of greater profits, a lower outstanding share count can artificially jack up Joy Global's earnings per share. That, in turn, may support its share prices in 2014, but that's not real growth. Given the severe headwinds in the industry, I think Joy Global shares may have a lot more of a slide to face before the bottom is hit.

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Related Tickers

9/27/2016 2:53 PM
JOY $27.56 Up +0.13 +0.47%
Joy Global CAPS Rating: ***
CAT $82.61 Up +0.24 +0.29%
Caterpillar CAPS Rating: ***