Why Joy Global Isn’t Giving Shareholders Reason to Smile

Source: Getty Images

Source: Getty Images

Joy Global (NYSE:JOY) is a massive company that competes primarily with Caterpillar (NYSE:CAT). Both companies have faced macroeconomic challenges as the economy continues to limp along, and the mining and manufacturing sectors continue to flounder.

Joy Global specifically manufactures and services mining equipment for the extraction of coal, copper, iron ore, oil sands, gold, and other minerals. It operates in two segments, “Underground Mining Machinery” and “Surface Mining Equipment.” The Underground Mining Machinery segment produces armored face conveyors, battery haulers, continuous chain haulage systems, continuous miners, conveyor systems, feeder breakers, flexible conveyor trains, high angle conveyors, long wall shearers, powered roof supports, road headers, roof bolters, and shuttle cars. It provides life cycle management support services, as well as equipment assemblies, services, repairs, rebuilds, parts, enhancement kits, and training. It also offers project management services and smart services, including equipment monitoring, predictive diagnostics, service training support, and parts management. This segment sells its products and services directly to customers through a network of sales and marketing personnel worldwide.

The Surface Mining Equipment segment produces blast-hole drills, conveyor systems, electric mining shovels, feeder breakers, walking draglines, and wheel loaders. It provides life cycle management support services, as well as equipment assemblies, relocations, inspections, service, repairs, rebuilds, upgrades, used equipment, parts, enhancement kits, and training. It sells its products and services directly to customers through a network of sales and marketing personnel worldwide. The stock hasn’t done much for years, although has started to move higher in recent months. However, I suspect there will be more of the same headwinds and Joy’s recent results, while impressive, still reflect an environment that is not favorable to this sector yet.

In Joy’s most recent quarter, things were downright terrible compared to a year ago consolidated net sales totaled $930 million – a 32 percent decrease versus the second-quarter of last year. Original equipment sales decreased 58 percent and service sales decreased 8 percent compared to the prior year. Current quarter net sales were reduced by $35 million from the impact of foreign exchange versus the year ago period. When adjusting for foreign exchange, sales were down 29 percent compared to the second-quarter of last year.

Net sales for underground mining machinery decreased 24 percent in comparison to the second-quarter of last year. Original equipment sales decreased 47 percent compared to the prior year, with decreases in all regions. Service sales decreased 5 percent compared to the prior year, with a decline in China partially offset by increases in all other regions. Net sales for surface mining equipment decreased 38 percent in comparison to the second quarter of last year. Original equipment sales decreased 66 percent compared to the prior year, with declines in all regions. Service sales decreased 11 percent compared to the prior year, with declines in all regions.Operating profit for the second-quarter of fiscal 2014 totaled $126 million, compared to $279 million in the second quarter of fiscal 2013. This was due to lower sales volumes, unfavorable product mix and lower manufacturing cost absorption.

This translated into fully diluted earnings per share for the second-quarter of fiscal 2014 totaled $0.73, compared to $1.69 in the second quarter of fiscal 2013. Excluding unusual items, fully diluted earnings per share for the second-quarter of fiscal 2014 totaled $0.76, compared to $1.73 in the second-quarter of fiscal 2013.

To make matters worse for the company, its tax rate went up. The effective income tax rate was 33.9 percent for the second-quarter of fiscal 2014, compared to 31.0 percent in the second-quarter of fiscal 2013. The increase in the effective tax rate for the quarter was primarily attributable to a change in geographical mix of projected earnings and a change in the net operating losses of certain foreign subsidiaries without a currently recognizable tax benefit.

Finally, a look at cash and expenditures is warranted. Cash provided by continuing operations was $142 million for the second-quarter of fiscal 2014, compared to $1 million provided by continuing operations in the second-quarter of fiscal 2013. The increase in cash provided by continuing operations during the second-quarter was primarily due to collection of accounts receivable, reduced pension contributions, and timing of tax payments, partially offset by lower earnings. Capital expenditures were $18 million in the second-quarter of fiscal 2014, down from $32 million in the second-quarter of fiscal 2013. Speaking about the quarter, Ted Doheny, President and Chief Executive Officer stated the following:

The Joy Global team continues to execute well despite significant market headwinds. The continued stabilization of our service business, strong cash generation and a multi-shovel order for the Canadian oil sands were highlights in the quarter. Additionally, the recent closing of the Mining Technologies International Inc. transaction will add to our underground hard rock mining growth prospects. As a result, we are pleased with our second quarter performance and the steps we have taken to advance the execution of our business strategy.

Looking ahead, Joy Global is facing severe headwinds. I will admit, I am surprised at the action in the stock given the earnings and sales declines. While much of this was expected, clearly the company isn’t growing in these important metrics. It is a healthy company that is repurchasing shares and paying a dividend, but I think the stock is ahead of itself here and cannot recommend it as a buy.

Disclosure: Christopher F. Davis holds no position in Joy Global and has no intentions of initiating a position in the next 72 hours. He has a hold rating on the stock and a $56 price target.

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