by Lawrence Meyers | December 13, 2012 10:55 am
I was a huge fan of David Milch’s HBO series Deadwood, and not only because of the huge amounts of profanity used. It created a complete world of Gold Rush-era South Dakota, including Seth Bullock and his partner Sol Star opening a tool and implement shop.
The smart people in the Gold Rush knew the way to make money was to sell the pickaxes and shovels to the prospectors. There was no risk involved in that transaction … unless you sold lousy equipment.
So it’s probably no coincidence that Joy Global (NYSE:JOY) showed up in 1885 in Milwaukee. By then, the idea of mining for natural resources had become set in stone, so to speak.
JOY handles both manufacturing and servicing of equipment for all kinds of minerals, especially coal, copper and iron ore. It has both an underground and a surface division, each requiring specialized equipment, and each requiring its own set of logistical and life cycle management support.
Build, relocate, inspect, service, repair, upgrade, buy and sell parts, and training others — all are part of the never-ending cycle of revenue.
As with all companies, Joy Global’s results can be influenced by near-term macroeconomic factors. That’s why it’s important to examine the company’s long-term strategy. Commodity usage, like energy usage, is never going to go away. It might ebb and flow with the global economy, but demand will always exist. Nevertheless, commodity prices do move in cycles. JOY’s core business has been growing, but as that growth slows, management says it will concentrate on new product development and acquisitions to maintain a 15% growth rate.
Coal is Joy Global’s big business, and despite saber-rattling from Obama over killing coal, there is tremendous amounts of it coming online, and China and India are structurally dependent on imports. The U.S. actually exported more this year than last year.
The company also has wisely diversified its offerings to include aftermarket equipment, as well as original equipment. Management tells us that they consider the aftermarket equipment to be both offensive and defensive with respect to the economy. It offers stability to revenue and earnings, yields high productivity with low cost, creates preferences for equipment and enables stronger margins.
As with the best businesses — especially ones involving complex machinery, such as rival Caterpillar (NYSE:CAT) — Joy Global is arguably entirely dependent on its quality of service. A company can sell equipment, but if it isn’t there to service it, it could die a quick death. By providing outstanding service to its customers, JOY not only increases capture rates, but once that customer is locked in, it also locks out competitors. The company boasts a 38% increase in component life and 45% improvement in production.
As for those new products, Joy Global is working on new mining shovels — apparently set to be the world’s largest — as well as a “Continuous Miner” for hard rock. That’s a big deal in the mining world. They hope to have these and other new products on-line in 2017.
JOY has been executing well for years. It went from being just barely profitable in 2003 to $1.7 billion in profits this year. The quarter just released Wednesday showed the company 9 cents ahead of estimates, with the total year bringing in $5.07 billion in sales. The company has $264 million in cash and generated $219 million of free cash flow. It also increased capex significantly for capacity and aftermarket service infrastructure.
The bad news was a decline in backlog orders and yearly bookings. As long as natural gas competes with coal, mining will be challenged, too.
What does all this mean for JOY stock?
The market liked the report, pushing shares up 4% to $60, so the stock now is trading at about 8 times earnings estimates. If you believe in management’s ability to pull of 15% sustainable long-term growth, the stock might be undervalued by half — suggesting a double from here is possible.
Even if they are wrong, at that kind of valuation, there’s a lot of leeway for error.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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