Joy Global Inc. (NYSE:JOY) recently announced its quarterly results. The company reported $1.31 earnings per share (EPS) for the previous quarter, beating the Thomson Reuters consensus estimate of $1.14 EPS by $0.17. The company had revenue of $1.15 billion for the quarter, compared to the consensus estimate of $1.08 billion. During the same quarter in the prior year, the company posted $1.33 earnings per share. The company’s quarterly revenue was up 1.2% year over year.
Joy Global Inc. (NYSE:JOY) manufactures and markets mining equipment used to extract coal, copper, and iron ore. Commodity prices directly impact the demand for Joy Global Inc. (NYSE:JOY)’s products and services. The company primarily sells two types of mining equipment — underground and surface.
Joy Global competes with its peers on the basis of price, quality, delivery and service. The company mainly competes with Caterpillar Inc. (NYSE:CAT) and Terex Corporation (NYSE:TEX). In this post, I will explain why Joy appears to be tremendously undervalued relative to its peers.
Equipment and Machinery Sector Outlook
The world economy is expected to grow roughly 3.9% in 2013, according to the World Economic Outlook published by IMF. Growth in advanced economies is projected at 1.9% in 2013, while it is anticipated that the emerging and developing countries would grow by 5.9% in 2013.
Demand for the machinery industry is correlated with increasing economic activity, which stimulates demand for industrial products, thereby increasing the need for new/advanced machinery. The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others.
The machinery sector has been doing reasonably well during the economic recovery. While momentum seems to be flagging a bit recently, the group’s growth performance has been one of the best in the economy, according to IMF.
Growth Catalysts for Joy Global
While U.S. fiscal policy was an overhang on the fourth quarter, many other indicators provided encouraging signs for the U.S. economy as 2013 began, including improving labor statistics, strengthening industrial production and recovering residential and non-residential construction.
The Chinese economy is reporting that year over year growth is now improving in numerous key measures, and this has positive implications for global growth. Joy estimates that the Chinese infrastructure needs is going to be enormous in the next few years.
After the share of power generation from coal dropped to a low of 32% in April of 2012, coal generated 42% of U.S. electricity in November. This trend of natural gas to coal switching is likely to continue in 2013.
As the major stakeholder (about 60%) of the metals market, the steel industry was severely bruised by the global economic downturn. Recovery, however, has been swift and forceful. According to the World Steel Association, with global steel demand expected to increase further in 2013, steel mills have begun to replenish depleted inventories of metallurgical coal and iron ore, which has provided further support to prices.
Copper is a major industrial metal, with its price strongly correlated with the outlook for economic growth. Refined copper was in supply deficit by approximately 250,000 tones for the year 2012. In 2013, completion of several mine expansions should increase mine supply, reducing the deficit.
Joy’s Shorter Term Guidance Encouraging amid Slowdown Fear
Although most industrial company CEOs seem to think that we’ve seen the worst of the industrial slowdown, industry leader Caterpillar lowered revenue and earnings guidance on global slowdown fears. Caterpillar reduced its 2015 sales and earnings targets. It now believes it can achieve $12-$18 in EPS on $80 billion-$100 billion in sales in 2015 compared to $15-$20 EPS, previously.
The key difference is slower global economic growth driving a slower recovery in end market sales; Caterpillar is more convinced it will be more profitable going forward. The company also indicated that if global growth turns out to be closer to previous forecasts, it would raise its 2015 target back to $15-$20.