by Susan J. Aluise | June 6, 2012 1:06 pm
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[1]) 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[2]) and Alcoa (NYSE:AA[3]). 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[4]) 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,”[5] 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[6], 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[7], PEG 0.7, P/E ~8).
I like JOY right now for three reasons:
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.
Source URL: https://investorplace.com/2012/06/3-reasons-to-buy-joy-global-on-the-dip/
Copyright ©2024 InvestorPlace unless otherwise noted.