Year to date, Joy Global (JOY) has fallen by over 22%. Meanwhile, the S&P 500 has risen by more than 13% in the same period. Joy's depressed price performance may have it showing up on value screens everywhere, but is this a good time to be long on the stock?
Overview
Joy Global is a $5 billion equipment manufacturer based in Milwaukee, Wisc. It makes things like drilling machines, conveyor systems, shuttle cars, and other equipment used in the mining of coal, iron, copper and other minerals. Though Joy is a fairly small company, it has a global footprint and sells equipment worldwide. In fact, about 40% of sales come from outside the US.
In big picture terms, Joy's business should have the wind at its back.The world's ever-increasing population -- over 7 billion people and counting -- guarantees continued demand for finite natural resources like coal and iron. This is particularly true with respect to emerging markets.
Consider China, for example; though it's still developing, it's already the world's leading coal consumer -- by a wide margin. In fact, China alone consumes more coal than most of the developed world combined.
This matters for Joy because the company derives more than 60% of it's revenues from the coal mining industry. In response, Joy has taken strategic steps to increase its exposure to key emerging markets. For example, it acquired the China-focused equipment maker International Mining Machinery in 2012 to expand its Chinese footprint.
Why Joy is depressed
Unfortunately, Joy's timing wasn't so good. Since last year, concerns about deteriorating economic conditions in emerging markets have been escalating. For example, China's GDP growth has slowed for the first two quarters of 2013. Such concerns have the MSCI Emerging Markets stock index down by 12% year to date.
The slowing growth has also affected Joy's business. As of its third fiscal quarter, Joy's revenues have declined by 12%, and earnings have fallen by 17%. In addition, new equipment orders for the quarter fell by a whopping 75%, and management provided cautious guidance for the year ahead. All of this should explain why Joy is down by more than 22% for the year.
Emerging turf wars
Adding to Joy's wall of worry is the competition. One of Joy's primary competitors, Buycyrus, was recently acquired by Caterpillar (CAT -0.55%), one of the world's leading heavy equipment manufacturers.
Big Yellow is more than 10 times the size of Joy (with a $54 billion market cap compared to Joy's $5 billion) and generates more than 10 times the revenues as well ($64 billion versus Joy's $5.6 billion.) Caterpillar also sees expansion in emerging markets as an important strategic objective. This places Joy in an emerging-market turf war with an 800-pound gorilla.
Another rival in that war is Komatsu (KMTUY -0.35%), a $21 billion equipment manufacturer based in Japan. Like Caterpillar, Komatsu produces a wider range of industrial equipment than Joy. Mining equipment is a major part of Komatsu's business, however. In addition, Komatsu may have the best positioning in key emerging markets because it's local to Asia and has established operations in China, India, Thailand, and Indonesia.
Mining for value
Dig deep enough, and there's probably something to like about any stock. For Joy, the company's valuation may fit that bill. Currently trading at 7.6 times its trailing earnings, Joy's price-to-earnings ratio looks very low relative to its own long-term average of 12, and the industry average of 11.
Of course, this low multiple may owe to deteriorating future performance. Consider, for example, that average forward P/E estimates are 9.2 times earnings, reflecting lower expectations. Even Joy's management itself has provided cautious guidance for the year ahead. Given the weakening trend in growth, warnings from management, , and generally negative market sentiment surrounding the stock, I think that Joy has more downside from here.
I won't write off Joy completely, though, because Joy's industry, business, and earnings are all cyclical and sensitive to economic conditions. Temporary dips in sales and earnings are to be expected. At the end of the day, the real question is whether or not Joy will be able to make it out of the current dip intact.
Based on the company's financial conditions, I think so. Joy uses relatively low financial leverage. It's debt-to-equity ratio of 0.4 is significantly lower than the industry average of 1.5. In terms of liquidity, Joy also looks healthy and has a current ratio of 2.0, slightly ahead of the 1.9 industry average. Joy's most recent balance sheet shows total liabilities of $3.18 billion, which are almost completely covered by its $3.10 billion in current assets. Financially, Joy looks just fine.
In addition, management has a solid history of effectively managing costs and profitability throughout the business cycle. Joy's posted 10 straight years of positive sales, earnings, and cash flow. Its five-year average return on equity is a stunning 48%, compared to an industry average of 22%. Combined, these characteristics are good indicators that Joy will be able to navigate the current cycle.
The bottom line
Judging by the various troubles haunting Joy, I doubt that there will be any joy for its stock price in the near term. That said, Joy could represent a good value at the right price if the company and business remain healthy.
I estimate a fair value to be around $45 based on Joy's historical earnings, book value, and average analyst forward earnings estimates (each multiplied by relevant multiples and averaged together.) The bottom line is that with all else equal, I think that Joy would be a reasonable value at $45 or better. Whatever you decide, remember to take your positions in moderation, as part of properly diversified portfolio appropriate for your needs and goals.
