Their shares are a reflection of that, as both are up about 50% this year, having reached 52-week highs in the past two weeks. That's five times the pace of the benchmark
Standard & Poor's 500 Index
. For Caterpillar and Joy Global, there are prospects of more gains ahead.
The companies, which make heavy-duty machines to unearth gold, coal, copper, silver and iron ore, have increased more than some technology stocks, driven by investors who expect stronger demand from emerging markets. There's also speculation that Joy Global might find a suitor that would be willing to best the 32% share-price premium that Caterpillar agreed to pay in its $7.6 billion buyout of its chief competitor,
, announced Nov. 15.
Caterpillar, which has a market value of $53 billion, has in effect bet the farm on mining by bulldozing its way into the leading "go-to" supplier in the mining-equipment industry. To safeguard its prospects, Caterpillar has an agreement to build a huge engine-manufacturing plant in China, where it's issuing bonds.
In addition to the Bucyrus acquisition, Caterpillar used its swift cash flow to buy German engine maker
in October for $810 million,
mining-equipment division for $1.3 billion in February and railroad-locomotive manufacturer
for $820 million last year.
In buying Bucyrus, Caterpillar is getting Terex's mining-equipment division, which Bucyrus bought for $1.3 billion in February.
Doug Oberhelman, Caterpillar's chief executive officer, said the Bucyrus deal was driven by emerging markets' demand for "everything that comes out of the ground," as well as companies' preference for so-called one-stop shopping for equipment and service.
Indeed, it doesn't look like the demand for mining equipment has peaked. Bernstein Research predicts that global mining capital expenditures will surge 50% next year to a record $113 billion.
, one of the world's largest mining firms, said its expenditures will be about $6 billion this year and to about $9 billion in 2011.
Caterpillar's vote of confidence in its industry has boosted interest in Joy Global, given that it's the last stand-alone U.S. mine-equipment manufacturer.
Joy Global has a market capitalization of about $8 billion, about the same as Bucyrus'.
In the Bucyrus deal, Caterpillar paid $92 a share, or about 18 times Bucyrus' 2011 earnings estimates. If the same ratio were to be applied to Joy Global, its shares would be worth $86.22 in a buyout. But given that there are no other companies with Joy Global's manufacturing capacity and brand recognition, that may be a low price.
And Joy Global has more attractive financial fundamentals, including a price-to-trailing-earnings ratio of 18.3 versus Bucyrus' 27. Still, Bucyrus, a manufacturer of surface and underground mining equipment, is complementary to Caterpillar's product line.
Of the 21 analysts that cover Joy Global, 11 rate it "buy," nine "hold" and one "sell," according to Thomson Reuters. Its shares are trading at 16 times 2011's estimated earnings. Analysts' have a mean $79.70 price target on its shares over the next 12 months based on a per-share earnings estimate of $4.79 for 2011, up from $4.16 this year.
Standard & Poor's analysts call Caterpillar "undervalued" at its current price of 15 times analysts' 2011 earnings-per-share estimate of $5.25, and they put a $95, 12-month price target on it based on a ratio of 18.1 times those earnings. Caterpillar's annual revenue is $37.7 billion.
Other firms that could benefit from the mining-equipment sector's booming demand, at least peripherally, include: engine makers
GE Transportation's Mining division, which makes motorized drive systems for mining vehicles;
, which makes heavy-duty trucks; crane makers
, an agricultural- and construction-equipment manufacturer; Japan heavy-equipment manufacturers
engine and mining-vehicle manufacturer.
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