No Joy at Joy Global

By Linda McDonough

Joy Global (NYSE: JOY) suffers the unfortunate consequence of such an optimistic name.  The manufacturer of heavy duty mining equipment, whose stock was already down 52% year to date before third-quarter earnings, saw its stock crumble another 15% on September 3rd

Its risky business calling the bottom in a stock and at first glance Joy looks like a perfect bear trap.  Estimates have been lowered and yet the company continues to miss numbers and lower guidance going forward.

Revenue has declined 13% year to date but bookings, an indicator of future revenue, are down 30%.  Demand for the company’s diggers, which cost $20,000-25,000 apiece, has all but dried up. Every one of Joy’s markets, coal, copper and metals, have all collapsed.

Joy Global CEO Ted Doheny, is brutally honest when describing the current marketplace:

The mining industry continues to be challenged with low pricing, regulatory issues, lower global demand drivers, strained cash flows, and oversupply commodity markets resulting in major reductions in capital expenditure plan. In some cases, we’d even seen complete freezing of all CapEx until a full project-by-project short-term payback assessments are completed. Without question it’s one of the toughest market landscapes in recent history, as a result, we continue to make prudent business decisions to reduce cost while still investing and driving our profitable growth strategies.

While his honesty is to be respected, there seems to be little hope of a turn on the horizon. China’s slow and painful deceleration and the glut of oil will likely prolong the pain that Joy is experiencing.

Joy’s dividend could be at risk as it searches for ways to conserve cash.  The company’s heavy debt load, which equals half shareholders’ equity, will likely need to be lowered to maintain its current debt rating.  Interest already eats up 20% of operating income, leaving little wiggle room for higher rates.

Current earnings of $1.80, could likely be cut in half if the world’s appetite for commodities remains subdued. That said, Joy is a well-managed company with super high barriers to entry. Once the hunger for commodities returns, Joy will be sitting in the catbird seat.  Until then we’d be on the outlook to buy Joy if the stock slips down to the low teens.