JOY - Joy Global

[bmichaud]

Curious if anyone has any thoughts on JOY within the context of a secular shift in China from primarily fixed investment-based economy to a more consumption-oriented economy. I fail to see how JOY holds up in a Chanos-short-CAT-on-too-much-China-exposure environment. Even if mid-cycle FCF to Equity per share is $5, where is the profitable growth going to come from to warrant a FV PE above 10X?

 

It's a relatively popular "high quality" name among value-oriented portfolios - Alex Roepers has been a big proponent the past couple of yeares, as well as a couple of other local hedge fund guys I know.

 

Attached are two Sum Zero write-ups on JOY.

 

There hasn't been much discussion on the board about the coal space, outside of natural gas I guess. Perhaps this will kick-start a conversation!

USRG_JOY_7-28-13_9a952fa85c.pdf

JOY_Global-_investment_thesis_2013-1_3fb5c2f9db.pdf

[bmichaud]

Also - JOY just announced earnings today and the stock is down ~5.5% pre-mkt - bookings, both original equipment and after-market got slammed....$1B buyback announced over the next 36 months, which I believe is a tacit admission the business is not as "non-cyclical" as some would have you believe - if it was truly non-cyclical, then the Company should be able to handle a $1B dutch tender at current prices.

 

Attached is the earnings announcement with some really good market commentary by the Company.

 

Also attached are two Street notes on the recent quarter.

JOY_News_2013_8_28_Financial.pdf

JOY_BMO_Note_8.28.13.pdf

JOY_Jefferies_Note_8.28.13.pdf

[dcollon]

bmichaud,

 

I have followed JOY on and off over the past few years and have never been able to get comfortable with what margin to attach to what sales figure.  The range I have used in the past has been very wide and has prevented me from taking a really close look. 

 

I thought these comments from management in today's release were interesting:

 

“Our aftermarket will continue to see headwinds as mines are taken out of production and volumes decline to balance the market. The U.S. coal sector has gone through that correction, and it took four to five quarters to adjust down, stabilize and start to recover. U.S. parts volumes are now on an improving trend and rebuilds are coming back into scope. That correction process has moved to Australia and China as customers in these regions deal with supply surplus domestically and in the seaborne markets. We believe that Australia is midway through its correction and China is in the early stages. The downside of these corrections includes reducing parts inventories held by customers at mine sites and extending the time between rebuilds. This results in an early over-correction that is then normalized. The impact of this rolling correction is expected to last through most of next year. Not all regional markets are expected to be affected, but the correction in some of our largest markets will not be fully offset by aftermarket growth in other regions in the near term.”

 

“As a result of these original equipment and aftermarket factors, our outlook is for order run rates to be higher than those experienced this quarter. However, the current outlook is unlikely to support annual revenue above $4 billion.”

 

Revenue at $4 billion or below is likely to produce eps of well below $5 even if one were to use high margins. 

 

What are your thoughts? 

[bmichaud]

That $4B sales figure was precisely what I had my eye on - so with a 10% net profit margin and 107.3 s/o, EPS would be $3.73. At its current 13% NPM, EPS is $4.85.

 

My guess would be that $4B of sales should be viewed as the new "mid-cycle", as global CAPEX budgets are likely not coming back to the levels of the past several years. As such, JOY's FVPS would range from $46.60 at 12.5X the $3.73 EPS figure to $72.69 at 15X the $4.85 EPS figure. At $48, it's trading at 66% of the $72.69 FVPS estimate - not too shabby. But again I question the 15X multiple - is growth in a non-super-cycle world going to be A) that high and B) that profitable?

 

I so badly want to pull the trigger though b/c A) it's quite washed out, B) short interest is over 15% of s/o and C) it's small enough to be a very easy take-out candidate for a larger company....

[dcollon]

The numbers you are using are certainly within my range, although my low end went below $3.50.  I also agree with you on the potential of the company as a takeout candidate.  The challenge for me continues to be what multiple to put on what eps range.

 

Do you think 10% nm's is low enough or should we be stress testing a figure below that?  I have attached a spreadsheet with some historical data on both margins and past multiples.

 

 

 

JOY.xlsx

[bmichaud]

Tough to say - hard to see margins getting back to the 7% level if after-market revenue begins to comprise a larger piece of the pie. The Union Square (nic snyder) Sum Zero write-up has a low-case 2014 scenario of $3.9B of sales and a 10.1% NPM, FWIW.

 

I have a hard time with "stressing" things to extreme levels because I never know what it tells me. So if margins drop to 5% but the market sees through it to the other side of the cycle, will the stock stay where it is currently? Will it trade at 10X the 5% margin level? I have no clue. Stressing a situation where there is legitimate potential of a liquidation (i.e. SHLD) makes more sense, since in a worst-case scenario you break even or generate somewhat of a return.

 

 

[starmitt]

Roepers only held it for a couple of quarters and has been out for a couple of quarters. The very few institutions that could be construed as making it a high conviction pick, I don't recognize.

 

It is priced below its long run averages but based on its free cash flow generation I am not interested unless it drops below $40. On the other hand it is valued much lower than the price CAT paid for Bucyrus a couple years back.

 

 

 

 

[dcollon]

Thanks bmichaud.

 

I'm certainly glad you brought the idea up as it's always nice to see someone else is thinking about it as well.  I love confirmation bias. ;)

 

Take care,

David

 

 

[bmichaud]

hahah nothing like some good 'ole confirmation bias  8)

[libor.plus1]

Joy is an interesting company and their management team has a reputation of being top notch. The problem I find is that they are way too China oriented. I think on one of the conference calls they said "we are effectively a Chinese company now."

 

That's not really a good sign in my books given the current slowdown in China. My other concern is that a division of Joy was recently accused of fraud a la Caterpillar.

 

China is one of those wildcards that's hard to quantify... but that said, I was really surprised that they blew past current estimates with earnings - although guidance sucked.

[bmichaud]

Some interesting commentary on China from Morningstar....

Presentation_20130731_Chinas_Rebalancing_Act_Will_Dictate_Winners_and_L1.pdf

[SpecOps]

Revenue has been continually declining as has the order book, but the management now thinks its reaching a more "stable" base level.

 

JOY is dependent on coal, copper and iron ore industries and the prices of each have been falling but stabilised somewhat over the last few months.