All Hail the Oracle of Milwaukee

• Email
• Share
• Print

No longer the lone oracle for wisdom-hungry investors, Warren Buffett has some hot competition from a couple of states over. The Oracle of Milwaukee is for commodity investors what Buffett means to the value crowd, and I believe that Fools consulting the Milwaukee mystic will reap great rewards.

Milwaukee-based Joy Global (Nasdaq: JOYG) is the oracle in question, delivering a level of insight and clarity on commodity markets with each successive earnings report that I consider required reading for every serious commodity investor. Because I have documented many of the company's key observations separately, including the clear dichotomy of coal demand between the U.S. and Australasia (revealed through the likes of Peabody Energy (NYSE: BTU) and Cliffs Natural Resources (NYSE: CLF)), I am comfortable suggesting to Fools that Joy Global's management team is about as dialed-in to the fundamental complexities of the commodities markets as any team I've encountered. Given how effectively this company has improved its operating margin despite challenging market conditions, we may just have the makings of a legendary management team here.

As Joy Global continues to work its way through an order backlog that peaked around $3.17 billion before conditions soured, the company posted a 10% increase in net sales and a whopping 67% increase in net earnings. The company's efforts to reduce operating costs clearly have paid off, with operating income at an impressive 20% of net sales versus 14% in the prior-year quarter. Competitor Bucyrus (Nasdaq: BUCY) posted a similarly positive first quarter back in April. Joy Global's earnings result outperformed analyst expectations by more than 30%, but given the sobering cautionary tone to the company's market commentary, I believe that Fools looking to invest in the quality of their management may find more favorable entry points on the flip side of this monster rally in equities.

Near-term red flags for the equipment manufacturing industry include Joy Global's tally of $300 million in cancelled orders over the past three quarters, $525 million in existing orders considered at risk of cancellation, and a 47% reduction in new order bookings. Joy cautions that China's major restocking efforts for resources like copper and iron ore are not likely sustainable at these rates … suggesting the possibility of a near-term correction for miners like Freeport-McMoRan (NYSE: FCX) and Rio Tinto (NYSE: RTP). Looking further into the future than it previously has, the Oracle of Milwaukee closed by predicting lower revenues for 2010 than 2009, and a 40% decline from last year's peak to a cycle trough during 2011. The oracle has spoken, and I hope Fools are listening.

Further Foolishness:

• Beware the Tyrannosaurus Terex.
• Keeping equipment investments focused.
• Peabody's play within a play.