When Wall Street shows fear and loathing, don’t automatically consider it an urgent reason to join the bears. You might miss out on the chance to pick up a value stock at a bargain price.
Despite Joy Global‘s (NYSE:JOY) tanking in recent weeks — and 35% pummeling since March — the mining equipment manufacturer’s long-term outlook is positive.
But first the bad news: China’s white-hot economic growth is slowing, mining stocks are on the schneid and the post-industrial world would far rather burn King Coal in effigy than as energy.
JOY shares have taken it on the chin lately because the company manufactures and sells mining equipment — with a particular focus on the coal sector. And with soft demand in the U.S., a natural gas glut and no quick fix for Europe’s ills, China is the biggest boon or bust for industrial stocks like JOY, Caterpillar (NYSE:CAT) and Alcoa (NYSE:AA). All three of those stocks have suffered deep declines in recent weeks.
Still, JOY’s second-quarter earnings beat analysts’ estimates on the top and bottom lines. Net income surged nearly 32% and revenue was up 45% over the same quarter last year, in part on dramatic growth in surface mining equipment sales and service.
So why did the stock fall more that 5% on the news? A 19% drop in equipment orders and concerns over weakness in China were the twin skunks at JOY’s garden party, prompting the company to scale back its full-year forecasts.
The good news: In the zeal to bail out of slumping sectors, bears sometimes surrender long-term value for short-term protection. Even with JPMorgan Chase (NYSE:JPM) cutting its full-year economic growth forecast for China for the second time in a month, GDP still is expected to grow by 7.7%. Falling inflation will make it easier for the government to inject substantial stimulus — the last time it did so, much of that money went into infrastructure investments.
And while EPA Administrator Lisa Jackson may want coal to “go away,” King Coal will not easily abdicate his throne. Global coal demand has almost doubled since 1980, driven by increases in Asia, where demand is up over 400% from 1980-2010, according to the U.S. Energy Information Administration. Led by demand growth in China and developing countries, global coal consumption will rise by 50% between now and 2035.
JOY is doing better this week — shares are up nearly 7% since Friday. Rumors that its attractive valuation could entice potential suitors, like Tokyo-based Komatsu Ltd., to pursue a takeover bid gave the stock added spark.
Joy Global set a new 52-week low of $53.25 last Friday — a big tumble from its high of $101.44 last July. The stock now is trading around $58 and has a current dividend yield of 1.2%.
The company’s fundamentals are intriguing: It has a price/earnings-to-growth ratio of 0.4, indicating that the stock is very undervalued, and a forward P/E of less than 8. That’s a hair better than head-to-head competitor Caterpillar, which has a PEG of 0.7 and a forward P/E of nearly 9, and it also compares well to sector peer CNH Global (NYSE:CNH, PEG 0.7, P/E ~8).
Bottom Line
I like JOY right now for three reasons:
- If China ponies up infrastructure spending now as it did in 2008, the equipment sector will benefit in the short term. If not, 7.7% growth in the world’s second-largest economy still is not too shabby and JOY’s market position there will pay off sooner or later.
- Coal might be a pariah in the U.S. and Europe, but demand will rebound in developing countries.
- Joy Global is cutting costs to be prepared for any eventuality. The company in recent years also has implemented leaner, more streamlined business processes that have made it more agile and quicker to respond to changing market dynamics.
A rebound seems in store for JOY, so buy with a price target of $80.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
