What: Shareholders of Joy Global (NYSE:JOY), a manufacturer and servicer of heavy-duty equipment most commonly used in the mining industry, had nothing to smile about on Friday, or all of last week. Shares fell $0.89, or better than 2%, on Friday to close at $39.05 following four price target cuts from Wall Street firms. It also marked Joy's seventh day in a row of share price declines.
So what: The impetus for the Wall Street "quadfecta" of price cuts was Joy's first-quarter operating results, released early Thursday morning. For those who may not have caught that report, net sales fell 16% year over year to $704 million, bookings dropped 19% to $700 million, and adjusted EPS was nearly half of what it was in the year-ago quarter ($0.25 versus $0.49). Looking ahead, management warned Wall Street to expect much of the same going forward until the mining demand dynamics change. It also noted it would focus more on its cost-cutting efforts.
In response, the following four Wall Street firms cut their price target, or perceived fair valuation, on Joy:
- Jefferies lowered its price target to $43 from $50.
- UBS cut its price target to $40 from $50.
- RBC Capital Markets softened its price target to $46 from $52.
- Deutsche Bank chopped its price target to $45 from $51.
All four firms rate Joy Global the equivalent of a "hold" under their ratings system, and they left that rating unchanged following its earnings release.
As for individual commentary, Jefferies noted that in spite of Joy's reduced EPS forecast and expectation that its second half could improve, it continues to believe this will be more of an "L-shaped recovery" where Joy takes time to find a bottom in orders and build a new base of bookings. RBC Capital Markets went with more generic commentary, blaming low commodity prices and high supply for what it suspects will be persistent near-term weakness. Lastly, Deutsche Bank pointed to limited visibility as its reason for caution.
Now what: The question investors need to ask themselves here is whether Joy Global's weakness has been accounted for in its share price, or if the stock could actually head lower.
As you might expect, a case could easily be made for both sides. On one hand, weakness in the coal market and softer copper prices are bound to hurt Joy Global's near-term bookings. These are commodities that don't have a history of rebounding overnight, making the prospect of an L-shaped recovery somewhat likely.
On the flip side, Joy Global is a monster player in mining machinery, giving it strong pricing power, still solid cash flow, and an advantageous position over the long term. Not to mention, its size gives the company ample avenues to reduce its costs. This isn't to say it hasn't already been trimming the fat, but there are certainly additional ways Joy's management team can buoy its share price by reducing operating expenses.
As for me, I'd suggest Joy is investable if your time horizon is three years or longer. Near term, Joy is likely to see increased volatility and minimal earnings visibility with commodity prices vacillating as wildly as they are. With reduced quarterly bookings, we're liable to see traders' emotions coming into play and pressuring Joy's shares. Over the long run, though, I see plenty of opportunity for global growth and wouldn't shy long-term investors away from digging more deeply into the company here.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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