What Should Joy Global Investors Expect in 2014?

Investors in Joy Global (NYSE: JOY  ) , a manufacturer of mining equipment, weren't thrilled by the company's performance in the past year. As a result, shares of the company shed more than 30% of their value in 2013. Will 2014 be any better for Joy Global? How is the company performing compared to other heavy machinery companies, such as Caterpillar (NYSE: CAT  ) ?  

Will revenue pick up in 2014?
Joy Global's fourth-quarter-earnings report for fiscal year 2013 didn't reveal any improvements in the company's operations. During the fiscal year, the company's revenue fell by over 11% and its profit margin declined from 20.7% to 19.5%. The main region that contracted was the U.S: Sales dropped by almost 15% during the year. 

Other heavy machinery manufacturers, including Caterpillar and Cummins  (NYSE: CMI  ) , have also recorded a drop in revenue and profitability during 2013. Caterpillar's revenue is expected to have fallen by roughly 16.5% during last year to reach $55 billion; its profitability is projected to drop from 13% in 2012 to 10% in 2013. Cummins' revenue fell by 2.5% during the first nine months of 2013. Its profit margin decreased from 13.7% to 12.2%. Cummins, unlike Joy Global, has done well in North America as sales in that region rose in 2013. Outside North America, Cummins has increased its sales in China and Brazil. Alas, this growth in sales was offset by lower demand in India, Australia, and Brazil. 

Joy Global's guidance for the first quarter of fiscal year 2014 isn't much better, and the company expects its revenue to decline further, mainly due to holiday shutdowns and due to wide gap between supply and demand. Moreover, the company's backlog, unfilled customer orders for the company's equipment, tumbled over 40% during 2013; this is another indicator that suggests the company's sales aren't likely to rise in the near future.

But looking further into the year, the developments in the coal and iron ore mining industries might push back up the company's revenue. Let's start with coal. 

The U.S coal industry contracted during 2013: According to the Energy Information Administration, or EIA, coal production declined by 3% during the first nine months of 2013, and it estimates that coal production shrank by 1.5% on a yearly scale. Nonetheless, the EIA projects that coal production will rise by 3.6% during 2014 mainly due to higher consumption and stable inventories. Sales in the U.S account for roughly 40% of Joy Global's total revenue. So for every one percentage point increase in U.S operations, the company's revenue could increase by 0.4 of a percentage point. 

On a global scale, the International Energy Agency estimates that the coal industry will expend by an average of 2.3% per year through 2018. Therefore, the slow recovery in the coal industry is likely to increase the demand for Joy Global's products and services in the coming years. 

Other heavy machinery companies, such as Caterpillar, are also likely to benefit from the recovery in the coal industry. Nonetheless, Caterpillar remains cautious and projects that its revenue will remain unchanged during 2014: The company expects a drop in resource industries' sales that will be offset by a rise in construction industries' sales. 

Besides the potential recovery in the coal industry, iron ore and steel production are also expected to rally in 2014.  

According to Australia's Bureau of Resources and Energy Economics report, world steel production is expected to rise by 2.5% during 2014 year over year. Iron ore world trade is projected to rise by nearly 9% during this year mainly due to higher demand in China. These figures also are likely to suggest that Joy Global will benefit from this growth in demand. 

In conclusion
Based on the expected recovery in the coal industry and the strong outlook for China's demand in iron ore, the heavy equipment industry is also likely to benefit from this recovery. Therefore, even though Joy Global's short-term outlook isn't too bright, the expected rally in the coal industry and the ongoing stronger demand for iron ore in China are likely to increase the company's sales in the long term.

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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9/1/2015 4:06 PM
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