Is Joy Global’s Stock a Buy Now?

With shares of Joy Global (NASDAQ:JOY) trading at around $68.40, is JOY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Joy Global is a well-run company that has a lot going for it, but external circumstances might present a challenging environment in 2013. On the bright side, Joy Global sports higher-than-industry averages for profit margin, net income, revenue growth, and cash flow. ROE is also an impressive 33.88 percent. Joy Global currently yields 1 percent, which isn’t going to excite many investors, but it’s better than nothing. The valuation seems appealing with a Trailing P/E of 9.59 and a Forward P/E of 10.38. So… what could possibly be wrong?

The main problem is a slowdown in the commodities boom. The upward trend in commodities has now leveled off for a long period of time. This usually indicates exhausted buying. It doesn’t necessarily mean a reversal, but the upside potential is very limited. This happened mostly due to a slowdown in China. Of course, stimulus measures have been taken in China, which will help short term, but that won’t last forever. The growth rate in China has peaked. However, there will still be growth. With a slowdown in China, companies like Rio Tinto (NYSE:RIO) have cut back on their spending, which is bad news for Joy Global.

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It’s possible that this bad news can be offset by coal demand in India. Coal is a very affordable way to produce energy, and India relies on coal to produce 55 percent of its energy. That said, investing in a company because there might be an offset to negative news is rarely a good idea.

Let’s take a look at some important numbers for Joy Global…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Joy Global is normal. It might not look overly impressive, but Joy Global’s debt-to-equity ratio is much stronger than the industry average. The balance sheet is in negative territory, but it’s manageable, and cash flow is good.  

Debt-To-Equity

Cash

Long-Term Debt

JOY

0.53

$263.87 Million

$1.31 Billion

DE

4.73

$6.12 Billion

$32.42 Billion

CAT

2.22

$5.69 Billion

$39.85 Billion

 

T = Technicals on the Stock Chart Are Mixed

The past year hasn’t been great for Joy Global. What’s more discouraging is how Joy Global massively underperformed Deere & Company (NYSE:DE) and Caterpillar Inc. (NYSE:CAT) over a three-year timeframe.

1 Month

Year-To-Date

1 Year

3 Year

JOY

10.97%

7.24%

-16.40%

0.26%

DE

5.25%

4.10%

8.69%

69.70%

CAT

8.10%

6.75%

-4.12%

69.59%

 

At $68.40, Joy Global is currently trading above all its averages. The stock has had some strong momentum recently.

50-Day SMA

60.66

100-Day SMA

59.33

200-Day SMA

59.85

 

E = Earnings and Revenue Have Been Strong

Earnings and revenue have steadily increased since 2009.

2008

2009

2010

2011

2012

Revenue ($)in billions

3.42

3.60

3.52

4.40

5.66

Diluted EPS ($)

3.45

4.41

4.40

5.72

7.13

 

When we look at last quarter on a YoY basis, we see an improvement in revenue and earnings.

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($)in billions

1.34

1.14

1.54

1.39

1.60

Diluted EPS ($)

1.62

1.33

2.00

1.81

1.99

T = Trends Do Not Support the Industry

This simply comes down to China. The growth won’t be at the same pace as it had been from 2009 to 2011. Coal demand from other parts of the world should help ease the pain a little.  

Conclusion

What we have here is a great company that is likely to find itself in a challenging environment in the near future. It should be noted that there is potential for Joy Global to be acquired by General Electric (NYSE:GE) in 2013, but it would be a longshot.

Joy Global is currently a WAIT AND SEE.

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