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Do Gurus’ Transactions Predict Joy’s Strong Performance in the Long Term?
Posted by: Vanina Egea (IP Logged)
Date: March 13, 2014 05:31PM
The mining sector continues to be under pressure since the last economic crisis as prices for mined commodities entered a downtrend in the second quarter of 2011. So far, prices for most precious and base metals, and steel raw materials seem to have stabilized throughout 2013. However, they are all far from recovering the lost ground as demand continues comparatively low, and activity in related industries slowly recovers. One of the most affected industries has been mining equipment, doubled whammed by a decline in new equipment purchases and original parts replacement. Joy Global (JOY) has not been the exception, but gurus have increased their holdings during the last quarter of 2013. Can you expect to be fortunate in the long term?
Analysts Say “Yes”, Performance Says “No”
Barclays, BMO Capital and RBC Capital have raised target price for Joy Global last Tuesday, March 11, by $4, $6 and $2 respectively. The first two expect stock price to reach $60 by the end of the current fiscal year, while the last is a bit more optimistic expecting price to reach $62. Regardless of differences, all financial institutions expect to see Joy Global grow throughout 2014. Prospects confirm the stabilization process secured throughout 2013, imitating commodity prices. However, the stock remains $30 per unit below 2011 levels.
Recovering the ground lost since 2011 will not be easy for Joy Global. The mining industry has just stabilized and there is no clear evidence to point at a swift recovery. To make recovery even more trivial, Director Richard B. Loynd unloaded 1,200 shares of the stock on the open market in a transaction dated Friday, March 7th. The market’s repercussion has been a $1 drop on stock price in a single day.
The 2014Q1 report has shown an additional decline in overall performance. The underground mining machinery and surface mining equipment have registered a 24.7% and 13.8% decline in revenues respectively. Also, original equipment saw a 42.7% drop as clients continue to prefer generic equipment or delay replacements. The only product that has seen a gain is service, however, it is nowhere close to offset the losses seen in the other segments.
Some Light in the Darkness
The new low-seam longwall product has booked its first order. True, a single will not change overturn current declining performance but feeds prospects for future growth should the market continue in a positive trend. On another note, management continues to direct its cash flow onto shareholder-value-enhancing activities. Moreover, new allowances have been approved to extend the program throughout the 2014 and beyond.
Other promising remarks for Joy Global are the considerable reduction on production time, growing presence in the Chinese market, and the acquisition of LTI. The impact positive impact of the mentioned developments has widened operating margins, improved earnings growth, and increased product offering.
Amid the decline and stabilization, Joy Global’s stock trades at 13.3 times its trailing earnings and carries a 25% premium to the industry average. Hence, gurus have not modified their holdings throughout the first quarter of 2014. Nonetheless, James Barrow (Trades, Portfolio) made an important investment during the last quarter of 2013 and turned into the largest shareholders. Other gurus, among them David Dreman (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio) have followed suit, but I consider the stock too risky and overpriced for a long-term investment at this point.
I disagree with the guru’s decision to heavily invest on Joy Global, mainly for two reasons: mined commodities have not shown to be on a recovery path, and overall performance continues to decline. I suspect their investment is aimed at the short-termed since the company continues to advance with its repurchasing program. While the investment will pay dividends, the dividends paid to small investors do not justify the risk.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Guru Discussed: David Dreman: Current Portfolio, Stock Picks
First Pacific Advisors: Current Portfolio, Stock Picks
Stocks Discussed: JOY,