On Jun 11, we reiterated our Neutral recommendation on Joy Global Inc. (JOY), the manufacturer of mining equipment used in various types of mining. Joy Global currently has a Zacks Rank #5 (Strong Sell).
Why the Reiteration?
Joy Global’s fiscal second quarter earnings exceeded our expectation but lagged year over year. The year-over-year decline was primarily due to lower contribution from Underground Mining Machinery (down 23.1%). The softness in demand from U.S. markets and lower shipments in China and Eurasia led to the decline in the segment.
Despite the earnings beat, we remain cautious about the decline in backlog as well as order booking. Since the commodities mined are presently in supply surplus, the miners are taking a cautious approach towards developing and expanding their mining projects. Unless demand recovers to cover up the excess capacity the mining equipment makers will find it difficult to accelerate profits.
A report from World Steel Association projects a nearly 3% increase in global steel demand in 2013 and 2014. The revival of demand in the steel market could act as a positive catalyst for the company. In the U.S. the demand for thermal coal is expected to rise due to a recovery in natural gas prices. This could act as another catalyst for the mining equipment company.
Over the next five years electricity generation is expected to increase globally by 300 gigawatts. This will require higher production of coal over the said period and in turn lead to more demand for mining equipment.
However, in a commodities supply surplus market miners are presently taking a very cautious step in developing new mines. They are also lowering the prices of mining equipment to stay competitive, which in turn puts downward pressure on margins. Moreover, Joy Global is exposed to foreign exchange risk given its substantial revenue exposure to international markets.
Intense competition in the mining industry, consistent expenditure in research & development to match its peers in the technology game and inherent risk of failing to meet customer demand are added headwinds.
Other Stocks to Consider
Joy Global’s present dividend yield of 1.42% compares unfavorably with the industry major Caterpillar Inc. (CAT) with a yield of 2.82%. Nonetheless, the company compares favorably with Astec Industries, Inc. (ASTE) with a dividend yield of 1.09% and The Manitowoc Company, Inc. (MTW) with a yield of 0.41%.
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