Don’t believe the analyst hype. Despite both BofA Merrill Lynch and Goldman Sachs upgrading Joy Global (JOY, Financial) stock in recent weeks, the long-term outlook for the coal industry is bleak. It might not go to zero, but its size and use as an energy source is dwindling.
The company’s new initiatives – direct service, hard rock and industrial minerals, reduced capacity, inventory reductions, share buybacks, new product development and high-growth markets – may prove effective but in the end will likely fail to produce value for shareholders.
Some believe that the recent coal bankruptcies from Peabody Energy (BTUUQ, Financial) and others could actually be good news for the company, but the industry is still headed for zero, which is not good for any company dependent on it. When Peabody Energy filed for bankruptcy, it took down the world’s largest private-sector producer of coal and is the latest in a series of major coal company collapses that threatens to leave behind a costly legacy that will haunt taxpayers and consumers for years. How many are left?
As an investor, you want to be on the right side of history. Going forward, coal is dead, and, despite the long line of profitability, Joy Global will need to change its model or die off.
Is this the end of an era?
Joy Global Inc. was founded in Milwaukee in 1884 under the name Whitehall Sewing Machine Company. At the time, Milwaukee was a center of industrial machinery manufacturing at the convergence of three rivers entering Lake Michigan.
Around the same time, in Cumberland, Maryland, Joseph Francis Joy worked as a slate picker in a coal mine and by 1903, the 20-year-old was designing ideas for mechanizing the coal-mining process. Finally, Joy obtained a U.S. patent on a new type of loader device in 1919 and launched Joy Mining Machinery. Eventually, Whitehall became Harnischfeger Corporation and acquired Joy Mining Machinery in 1994 for $700 million, which inflation adjusted represents about 55% of the current market value.
2006
- Revenue: 2.4 billion.
- Net income: 416 million.
- Dividends: 0.41.
- Shares: 123 million.
- Book value: 7.82.
TTM
- Revenue: 2.99 billion.
- Net income: -1.2 billion.
- Dividends: 0.61.
- Shares: 98 million.
- Book value: 13.73.
Conclusions
Joy Global is losing $3 million a day. It has over $1 billion in debt and only $100 million in cash. The short positions are mounting, and the industry is contracting. Vale SA (VALE, Financial) further reduced its capital investments for 2016 to $5.5 billion and plans to invest only $4 billion in 2018. The situation is no different for other miners, including giants like RIO Tinto (RIO, Financial), BHP Billiton (BHP, Financial) and Cliff Natural Resources (CLF, Financial).
Joy’s backlog has been shrinking over the last couple of years. For the end of the first quarter, the company’s net sales declined 25% from the same quarter of last year. In addition, its consolidated bookings declined by 21%, down to only $550 million in the first quarter. Orders for original equipment were down 33% while service orders were down 18% quarter over quarter.
Here’s the likely series of events: Joy cuts dividends to conserve cash. Then it reduces its labor force. Sales shrink, and profit does not rebound. Finally, it files for bankruptcy protection.
Guru positions
Joel Greenblatt (Trades, Portfolio) and Jim Simons (Trades, Portfolio) should be selling their stakes soon, despite having just a fraction of their total assets in the company – “it’s a dog with fleas” – and its business is going the way of the old school camera – and Joy Global is Eastman Kodak (KODK).
Disclosure: I do not have a position in Joy Global.
