The ripple effect of the long-term downtrend in commodity prices has claimed another victim. This time it’s Joy Global (JOY), the world’s largest manufacturer of underground mining equipment. JOY stock tumbled sharply after the company posted its third-quarter results and trimmed guidance for the full year.
Investors presumed both could be bad, but didn’t expect they’d be this bad.
And yet, for speculators who believe the prices of coal, gold and other natural resources found underground have already hit bottom, JOY stock has become a compelling, or at least interesting, value proposition.
Joy Global Q3 Earnings
Last quarter, Joy Global earned 54 cents per share on $792.2 million in revenue. Both came up short of their year-ago comparable, when the company turned revenue of $876 million into a per-share profit of 80 cents. Perhaps even worse, both fell short of analyst estimates; the pros were calling for a top line of $799.3 million and a bottom line of 60 cents per share of JOY stock.
CEO Ted Doheny noted of the numbers:
“Our financial results for the third quarter reflect an end market environment that is one of the most challenging seen in decades. The further step down in commodity prices resulted in projects getting delayed and a lock down on cash from our customers which impacted our service business. We are accelerating our facility optimization plans and taking additional cost reduction actions to align with lower market demand.”
Doheny wasn’t just blowing smoke, either. Coal prices are at multiyear lows, with no end to the downtrend in sight. Gold prices are also near multiyear lows, and though they’re still up 4% from their multi-year lows reached in July, that recovery effort has already stalled … if it even got started in the first place.
Throw in the fact that China’s economic engine is also slowing down, and it’s not tough to conclude that this weak period for Joy Global could remain weak for a while.
That’s likely why JOY made a point of reeling in its fourth-quarter and full-year outlooks as well.
The company now foresees a full-year profit of $1.80 per share on sales of $3.1 billion. Both paled in comparison to prior profit guidance of between $2.50 and $3 per share of JOY stock, and is well short of the revenue between $3.3 billion and $3.6 billion the company had previously offered. It’s also a weaker outlook than analysts had been collectively expecting. They were looking for an average profit of $2.43 per share of JOY, on revenue of $3.29 billion.
In that light, it’s no surprise that JOY stock tumbled more than 19% at one point today.
Time to Buy JOY Stock?
As miserable as the day has been for Joy Global, JOY is now valued at a trailing price-to-earnings ratio of 6.9 and a forward P/E of 7.6.
It’s not a trade for the faint of heart, of course. It’s conceivable that a sustained slump in commodities could lead to more earnings misses in the future, dragging JOY stock even lower. If natural resources have fallen as much as they’re going to fall, however, those P/E levels will be bargain-basement prices when looking back a year from now.
There’s the rub, of course. It could take a year to fairly determine if commodities have truly made a bottom. Miners won’t be too quick to jump back in the saddle and ramp up capital expenditures again until it’s crystal clear stronger commodity prices will justify those investments.
Still, as Baron Rothschild put it, the time to buy is when there’s blood in the streets.
Caterpillar Offers a Clue
For more insight as to what Joy Global is experiencing right now and when things may improve, investors may also want to scrutinize peer and competitor Caterpillar (CAT).
The rival heavy-equipment maker is expected to report a profit of 90 cents per share when it unveils its prior quarter’s numbers in October. That’s down from the year-ago earnings figure of $1.72 per share. Caterpillar’s sales are expected to come in 14.7% lower on a year-over-year basis, at $11.56 billion. A beat or a miss, or the rhetoric from Caterpillar at the time, may shed some more light on Joy Global’s true condition.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
