The Joy of the Global Commodity Boom

Wrapped in ribbons and bows
Joy Global (Nasdaq: JOYG  ) was not included on the naughty or nice list, but its results for 2006 were definitely nice. The mining equipment manufacturer posted excellent results for the fourth quarter and full year of 2006. For the quarter, earnings per share rose 58%, driven by a 21% increase in sales, improved margins, and a lower share count. For the year, profits jumped 181% to $3.38 per share. Excluding $0.88 of tax adjustments, profits were still extremely strong. Orders for the quarter rose 28% over 2005 levels to set a record of $836 million. Plus, the company increased dividend payments, continued to buy back shares, and increased earnings guidance for the 14th quarter in a row.

The background to these results is a global commodities boom. Joy Global is divided into two segments: P&H Mining Equipment, which makes surface mining equipment (for open-pit mining), and Joy Mining Equipment, which makes underground equipment. Surface equipment generates about 40% of revenues and is driven by commodities like copper, coal, and iron ore. Underground equipment accounts for roughly 60% of revenues and is largely driven by the coal market.

A lump of coal
When we were kids, adults would threaten, If you don't behave yourself, Santa Claus will give you a lump of coal. Probably the most surprising thing about the results Joy Global posted for 2006 was that they occurred during relative weakness in the domestic coal market. With 30% of P&H revenues and 90% of Joy Mining revenues driven by coal, one could have expected different 2006 results.

With the heavy dependence on coal in mind, investors ought to wonder whether or not the party may be coming to a close. Oil prices have eased, alternative energy garners big headlines, and dirty old coal seems so much like Dickens and the 19th century. Yet the future for coal is quite bright. Coal demand was weak this year mostly because of mild weather, which may or may not persist in the short term. 2007 could be another year of mild weather, coal stocks could pile up, and projects for mine expansions could be delayed.

Looking further into the future, it's a fair assumption that mild weather won't persist. Coal provides the lion's share of U.S. power generation capacity and will do so for the foreseeable future. The Energy Information Administration projects 156 gigawatts of new coal-fired generation capacity are going to come online by 2030 in the U.S. alone, with coal-fired capacity actually increasing its share of U.S. power generation. Internationally, coal-fired generation is also growing, and companies like Sasol (NYSE: SSL  ) are forming partnerships with coal-rich nations like China to develop automotive fuels.

Warm up to the long-term view
Joy Global, and other equipment manufacturers like Caterpillar (NYSE: CAT  ) and Bucyrus (Nasdaq: BUCY  ) , seem to get kicked around every time commodity prices drop. Mr. Market has been very emotional with Joy Global, sending shares to over $70 last spring, then down to $32 in September. Even with the 10% jump in Joy Global shares over the past couple of days, the stock remains 30% below its high price from early May.

However, Joy Global is benefiting from long-term growth in commodity extraction. Traders react to price reductions in coal or copper as though the sky is falling. Yet for most commodities, current prices are far above production cost, global demand is growing, and companies all over the globe are investing to upgrade aging equipment or expand capacity.

If you believe in the long-term prospects for the commodity market, Joy Global is the picks and shovels company. Buying during the current ebullient mood of Mr. Market, however, is probably a bad idea. Wait a while and a warm winter week might create a bit of weakness in coal demand, sending shares tumbling to more reasonable levels.

Sasol is aGlobal Gainsrecommendation. Want to venture beyond Wall Street? Bill Mann and his team at Global Gains size up stocks from around the world.

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Fool contributor Robert Aronen owns shares of Joy Global but no other company mentioned in this article. He's not so sure he was nice this year. If this is the year he gets the lump of coal, he just hopes that Joy Global had a part in mining it. The Fool has a disclosure policy.


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