The Joy of Global Mining

NEW YORK (TheStreet) -- If I could only lead my readers to more home runs as I did in my article about the "Great Donut Debate". Alas, home runs are the exception.

At the time I didn't know one of the two companies, Krispy Kreme ( KKD), would skyrocket in the two days following the article's publication. All I knew is the company would report earnings last Thursday and that I had done a good deal of research about it.

Now I'm sharing some research I and some of my colleagues have done on another company, one of the leading providers of mining equipment for the extraction of coal, copper, iron ore, oil sands and other minerals in the world.

Joy Global ( JOY) has about 1/10th the market cap of its big competitor Caterpillar ( CAT) and certainly doesn't offer the same wide-ranging types of equipment as CAT.

It's a company with a mission that is focused on a particular niche, which, like the donut business, isn't always a sure-fire success in all kinds of seasons and economic climates. Yet, if you look at its no-nonsense Web site you see how it distinguishes itself.

The company is focused on technologies that it claims will "revolutionize mining." The site goes on to explain, "Our business is focused solely on serving surface and underground mining operations with superior equipment and direct service that achieves the lowest cost per unit of production over the life cycle."

JOY's scope is global, with facilities and service centers that span six continents and more than 20 countries. Yet, its focus remains local.

Above ground and below, it proclaims a determination "... to create a more seamless experience that raises the bar for the entire industry." If you examine JOY's fiscal 2013 second-quarter earnings results you'll likely notice how determined the company is to live up to its mission in the face of some challenging worldwide obstacles.

The results were in some ways better than anticipated. Quarterly revenue growth was actually slightly above the same quarter last year. Net sales in the second quarter were $1.4 billion compared to $1.5 billion for the same period last year.

Operating income was $279 million, or 20.5% of sales in the second quarter of 2013, compared to operating income of $333 million, or 21.6% of sales in the second quarter of 2012. JOY has maintained an impressive trailing 12-month (TTM) operating margin of almost 22%.

Income from continuing operations was $182 million, or $1.69 per fully diluted share, including restructuring charges, compared to $218 million, or $2.04 per fully diluted share, in 2012. Year-over-year quarterly earnings growth was just about break-even, which took skillful cost planning and management.

Second-quarter bookings decreased 8% to $1.1 billion in fiscal 2013 compared to the second quarter of last year, but increased 10% sequentially over the first quarter of this year. This reflects JOY's reputation to be where and near the action is and close by to its customer's projects.

The chart below, which spans five years, gives us a better illustration of how the company has kept its head above water in a time of worldwide contraction, mineral surpluses and one economic crisis after another.

JOY Chart JOY data by YCharts

JOY's income from continuing operations (TTM) is a ray of optimism that was reflected in the conference call last Thursday. "This second quarter again reflected strong execution against continued market headwinds," said Mike Sutherlin, president and chief executive.

He added, "Revenue were down 12%, in line with expectations, and operating profit margin remained strong at nearly 21% due to operational efficiencies and cost reduction efforts. Our original equipment order stream included a longwall system for U.S. coal and, as expected, our aftermarket orders improved sequentially.

"Even though the overall order rate continues to reflect soft market conditions, the base order rate, before major projects, has been consistent over the last five quarters. We see this as providing market stability until the current commodity supply surplus is worked off."

Action Alerts Plus Research Director Stephanie Link and Jim Cramer responded to the earnings results.
An encouraging sign is that the base order rate (before major projects) has been consistent over the last five quarters. We had been looking for stability, which is key and now the next leg will be the recovery.

Should any hints of this emerge over the next few months, they'll be viewed positively, and we want to be ahead of that. Backlog fell 9% sequentially, to $2.2 billion from $2.4 billion. But the book-to-bill ratio, at 0.83x, was better than 0.8x in the prior year and the whisper numbers, which were 0.7x and below. Book-to-bill was 0.89x in the prior quarter."

Both Link and Cramer reflected on the downside as well, hinting that the global metals and mineral surpluses are most likely reflected in the current pricing.
On the negative side, China remains slow, with electricity demand growing at only half the rate that it has done in prior years. Growth is estimated at 5% in 2013, down from 7% over the last five years. We think this is well-known, and that it's the reason Joy Global trades at half its multiple, as compared with its historical average. India, for its part, remains strong with 29% growth.

As the chart above indicates, JOY's shares are, as of the close of the market on Friday, 22% below its 52-week high of $69.19. Selling at a current PE ratio (TTM) of 7.6 and a forward (one-year) ratio of 9, the share price is beginning to look oversold. Its five-year expected PEG ratio is only 0.84.

At a Friday closing share price of $54.08, the current dividend offers a yield-to-price of 1.3%, which represents a sustainable payout ratio of only 10%. This most likely reflects management's carefulness about utilizing the company's $270 million in total cash (most recent quarter) carefully.

With levered free cash flow (TTM) of $736 million, and with the prospects of a recovering worldwide economy in the second half of the year, JOY may do better than the pundits anticipate. It's not likely to see its share price leap 35% in 2 days like a certain donut company, but it does have increasing upside potential.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

More from Opinion

These 5 Tech Giants Still Aren't That Expensive

These 5 Tech Giants Still Aren't That Expensive

Intel CEO Brian Krzanich's Ouster Proves CEOs Aren't Above the Rules

Intel CEO Brian Krzanich's Ouster Proves CEOs Aren't Above the Rules

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Throwback Thursday: Intel Edition

Throwback Thursday: Intel Edition

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others