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.
Around the Roadrunner Portfolios
Even Ambarella’s (Nasdaq: AMBA) sharp-shooting camera chips couldn’t have foreseen the draconian drop in its stock price based on its recent earnings. The chip-based camera company reported revenue and earnings for the second quarter that beat analysts’ estimates, an event typically greeted with stacks of buy orders. Instead the stock was slammed down almost 20% to $75.
The company, whose chip-based cameras are used in drones, home security products and wearable cameras, has enjoyed escalating growth rates over the past six quarters. Therein lies the problem. Despite reporting a remarkable 79% revenue growth rate, investors chose to focus on guidance for the next quarter which assumes “only” 40% growth.
At issue is the timing of certain product releases. Ambarella’s chips are used by GoPro in their wearable cameras. Some, but certainly not all, of Ambarella’s magnified growth has occurred due to the continually-evolving product line of GoPro (Nasdaq: GPRO). As GoPro stocks the shelves of its customers with each new model, Ambarella enjoys a boost in orders.
As would make sense, GoPro typically releases new products in the fourth quarter to coincide with holiday shopping. This means that Ambarella sees a boost to third quarter revenue, as GoPro’s manufacturers begin to assemble product for delivery the next quarter.
This year GoPro shifted its product release schedule. It released the Hero4, their newest, lightest wearable camera and the Hero+LCD in July of this year which boosted second quarter revenue. This partly explains guidance for the second half of the year which predicts only 14% earnings growth.
While Ambarella’s stock may take a bit to settle down, it is certainly a better bargain now than it was before earnings. At $95 the stock traded at a PE to growth (PEG) ratio of 1.5 on 2017 earnings versus a PEG ratio of 1.3 now. Ambarella’s slowdown is likely temporary.
The company has $7 per share in cash and continues to gain traction with other customers like Nest, who has incorporated its chip based camera into its home security products. As Ambarella cycles through this shift in order patterns, higher growth should resume.
OmniVision Technologies (Nasdaq: OVTI) reported a strong first quarter on August 27th. As expected, revenue dropped but was $3 million higher than anticipated. Earnings were $0.46 per share, seven cents better than expected.
Management lowered guidance for the following quarter, warning that volatility in China would hurt earnings. The weakness in China is partly due to the devaluation of the Yuan and partly due to the success of Apple’s iPhone, which competes with the phones that OmniVision’s customers sell. Mobile products still represent 65% of OmniVision’s revenue, leaving it vulnerable to weakness in this market.
However, CEO Shaw Hong remained upbeat regarding uses for OmniVision’s chips in automotive applications. On the conference call, Hong noted:
For the automotive market, our automotive business continues to grow at a very fast pace. It actually surpassed entertainment and notebook last quarter in terms of revenue contribution. We are reaping benefits from our design-win pipeline that we built up a few years back and are shipping at very healthy volumes to various applications designed for driver assistance. We are now extending our design-win pipeline with machine-vision based applications, such as land departures and road-sign recognition.
The stock continues to trade at a discount to the outstanding $29.75 all-cash bid by Hua Management. The company sold off its equity interest in two companies in an attempt to gain clearance approval from Taiwanese authorities but that group plus the Republic of China and the Committee of Foreign Investment in the United States still need to approve the deal.
Although OmniVision’s stock may be in a stand still until more news is released regarding deal approval, current estimates look reasonable and the company still holds $11.00 per share in cash.
Looking at the chart of G-III Apparel (Nasdaq: GIII), you’d have a hard time believing the market has been so soft. The stock, which we put in the Roadrunner Momentum Portfolio in May 2013, is up 236% and shows no sign of slowing down.
Second-quarter earnings, reported on September 2nd, were $0.27 per share, seven cents better than expected. In addition management raised estimates for the year from $2.71 to $2.83, a number that represents impressive 26% growth.
G-III’s recipe for focusing on fashion forward women’s wear continues to spew out winners. The company’s dress business has been growing remarkably fast. Management commented that Vince Camuto and Eliza J, two of its most popular dress labels, are growing faster than 50%.
The company’s recently signed joint venture with Karl Lagerfeld will allow it to capitalize on this iconic designer’s name. On the conference call, CEO Morris Goldfarb gushed enthusiasm regarding this new line:
We are confident that the Lagerfeld brand can support a wide array of businesses. We believe the total brand opportunity conservatively is well in excess of $0.5 billion. We are moving quickly and have already begun marketing and selling dresses, sportswear and handbags, which should be in the stores by the end of fourth quarter.
G-III is up 34% year to date and currently sells at 21 times 2017 estimates, a discount to its growth rate. We still think investors can dress up their portfolios with G-III.