The mining industry had a difficult time in 2013. The industry had been plagued with overcapacity due to a macroeconomic slowdown, resulting in weak commodity prices. This is why the performance of mining equipment and machinery makers such as Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY) has been wretched.
Last month, the company lost a major contract in Illinois to manufacture locomotives for high-speed trains. Caterpillar lost the contract to Siemens AG and Cummins, who were given a $226 million contract to produce 32 diesel locomotive engines capable of running at a speed of 125 miles per hour.
In addition, Siemens also has the right to provide 225 extra locomotives, which could rake in a total of $1.5 billion for the company. This has dented Caterpillar's hopes of dominating the railway segment and the company is clearly not happy about it. The company even claimed that Siemens' locomotive will fall short of the 125 miles per hour speed requirement unless it was travelling downhill.
- Warning! GuruFocus has detected 9 Warning Signs with JOY. Click here to check it out.
- JOY 15-Year Financial Data
- The intrinsic value of JOY
- Peter Lynch Chart of JOY
In view of the weak performance and expected weakness in the end markets, Caterpillar also cut its full-year forecast. For 2014, its sales forecast clearly suggests that weakness from mining customers would continue to impact the performance of the company.
In recent discussions with mining executives, Caterpillar Chairman and Chief Executive Doug Oberhelman said they had all made one thing clear: "Any expansion in the near term is dead, it's over, it's not going to happen."
No Joy At Joy Global
Joy Global, like Caterpillar, faces the problem of oversupply in its end markets. Last year, global consumption of coal grew 2% to 7.84 billion tons while production grew 3% to 7.88 billion tons. In addition, coal consumption growth in China is estimated to have slowed down to 4% year on year in 2012, down from 10% in 2011. This resulted in a surplus of coal supplies, leading to a decline in price. As a result of lower prices, mines started putting off capital expenditures and this hurt both Joy Global and Caterpillar.
Coal accounted for nearly 62% of Joy's total sales, highest amongst its rivals like Caterpillar. Even though coal still accounts for more electricity generation than natural gas, the gap is narrowing. Due to the reduced dependence on coal, coal miners are looking to exports in order to drive growth, but it isn't as easy as it sounds. Many people have protested against the Gateway Pacific Terminal, a proposed coal export terminal at Cherry Point, near Bellingham, Washington, because of its negative social and environmental impact.
Moving on to the service business, Joy Global expects an improvement in this segment as service orders increased 4% year-over-year. The performance of the service segment is critical due to weak commodity pricing. Joy is investing in service centers globally that will support its installed fleet and provide world-class technical expertise to customers, and bring in more service revenue. It has high expectations from its newly-built service center at Peru, which is expected to support the fast-growing copper market.
The global mining equipment market is expected to reach $117 billion by 2018 at a CAGR of 8.5%. Surface mining equipment holds the largest share of this market at nearly 37%, followed by underground mining equipment. The Asia-Pacific region is projected to be the fastest-growing area in the coming years, fueled by increasing mining production and related machinery sales in India, China, and Indonesia.
According to a report from the International Energy Agency, coal's share of the global energy mix continues to rise, and by 2017, coal will come close to surpassing oil.
The world is expected to burn around 1.2 billion more tonnes of coal by then, which is the current combined coal consumption of the U.S. and Russia. According to the agency, China and India are expected to lead growth in coal consumption over the next five years.
In the open-cast mining sector involving iron ore, there are conflicting opinions regarding growth projections. Australia, the largest iron ore exporter, forecasts exports to rise 14% in the ongoing fiscal year. Here again, oversupply remains the main concern and this will fuel weakness in pricing due to loss of growth momentum in China and India.
The economic recovery in major commodity markets is going to be a long drawn process and hence, the growth in commodity demand will be slow. The cut in capital expenditure by the mining industry in general is also an indicator that recovery will be slow.
Both Joy Global and Caterpillar are trying to keep investors happy through share repurchase and dividends. Caterpillar, for example, has repurchased $2 billion worth of stock this year and raised the quarterly dividend by 15%. Joy Global has also announced a share repurchase to the tune of $1 billion over the next three years.
Buy on the dip?
Both Joy Global and Caterpillar are facing difficult times and a recovery is not expected in the near future. So, investors looking to buy these companies at their current levels would need to be patient. Additionally, management is looking to keep investors in good spirits through dividends and buybacks. But for those looking for a really cheap option, Joy Global could be the ideal pick. It has a yield of 1.30% and a trailing P/E of just 11.4. The stock has declined almost 37% this year and is worth a look for the long run.
On the other hand, Caterpillar could be a safer pick, even though it has been witnessing steep drops in revenue and earnings. Its huge size, presence in China, brand equity, and diversification across the globe are advantages for the company. Moreover, the company has a nice dividend yield of 2.70% and has held up well this year with the stock remaining flat, but it is more expensive than Joy Global with a trailing P/E ratio of 17.4. So, investors can consider either Caterpillar or Joy Global for their portfolio, but they would surely need to wait for quite some time to see their investments bear fruit.