Joy Global (JOY, Financial) is a leading equipment maker for the extraction of coal and other minerals and ores. Two guru investors own big positions in JOY — James Barrow (Trades, Portfolio) with a 10.44% stake and Brian Rogers (Trades, Portfolio) with 3.33%.
Joy Global’s entire business is tied to commodity prices. High prices for coal, copper and iron ore encourage expansion, which leads to bigger backlogs and both near-term sales and longer-term aftermarket sales opportunities. Caterpillar (CAT, Financial), Joy Global’s larger competitor, trades at 14 times earnings and has a more recognized brand and better product mix. Yet, while the market has only discounted CAT 21% this year, it’s crushed JOY.
Let’s do a Ben Franklin comparison on this stock. Keep in mind, I’m biased to Joy Global at this price and believe that over the next few years, investors could see a very strong increase in value.
Negatives
- JOY's stock price is off 63% in 2015. It started the year north of $47 per share and is now $17.11.
- The company has total debt of $1.27 billion, giving the firm a high debt to net income ratio.
- Commodity prices are off across the board, with coal down 20% on the year.
- Plenty of short sellers have profited in the stock already, with 22% of the float short.
- Negative year over year revenue and book value growth along with a backlog decline down $70 million to $1.26 billion.
Positives
- PE and PB are well under industry, S&P and company averages.
- Joy has bought back 21% of its shares outstanding since 2005.
- Dividend payments have increased 167% over the last decade. The company now pays out 32% of earnings to shareholders. The 2015 yield will be 4.8%.
- EPS has grown by 108% since 2005, with estimates in the $2.50 range for the next year.
- Book value has grown by more than 422% since 05’ from $5.48 to $28.15 currently.
- CapEx spending is very low compared to its income, a very important trait compared to Caterpillar who regularly spends more than its net income on PP&E.
Valuation
The key question is whether Joy will continue to grow its sales and book value. That’s why we judge the past first, which includes excellent growth and high profits. In fact, in the last decade, Joy Global generated a net profit of $4.37 billion. It’s current market value is $1.64 billion. So, all it has to do is match the last decade and it’s a screaming bargain. Even doing half as well will be a win for investors.
I can’t see the stock multiple staying below 10 for long, unless the short sellers are deciding to just borrow naked and push the stock down even further. This is possible, but a risk worth taking considering the dividend payout close to 5%.
The potential outcomes I see are either (i) the earnings continue to erode and the share buybacks don’t help; or (ii) the earnings get back to stable ground and buybacks accelerate growth over time. Considering the business and industry Joy operates within, I believe the second scenario is more likely. If this happens, as I see it, the company could earn $3.50 per share in the next few years and price in the 10x to 15x range with a $35 to $50 stock price.
