Mining equipment giant Joy Global (NYSE: JOY) reported solid fourth quarter results, but provided a weak outlook Wednesday morning. Revenue jumped 19% year-over-year to $1.6 billion, roughly in line with consensus expectations. Earnings, adjusted for a few one-time expenses, easily exceeded expectations, growing 16% year-over-year to $2.13 per share. However, the firm’s outlook was pretty grim, with earnings expected to fall to $5.90-$6.50 per share in fiscal year 2013 from the $7.13 the company earned this year. Revenue is expected to drop substantially from $5.6 billion to $4.9 billion-$5.2 billion. Both figures are below consensus expectations.
It comes as no surprise that the company cited weakness from miners, which have recently become interested in commercializing only the highest grade, lowest cost projects. This has posed a demand headwind for Joy Global’s value-added mining equipment. We’re already seeing the impact percolate on the surface, with underground mining machinery revenue increasing a paltry 3.6% year-over-year, to $775 million, which was substantially worse than the growth rates of surface mining (up 35%) and LeTourneau (up 27%). Profitability in the segment also fell substantially, down 10% from a year ago to $169 million. Management blamed last year’s fantastic results in its underground mining segment for the decline in profitability, though we believe prices must have taken a tumble given the sales increase.
Looking at the firm’s 2012 bookings, we see that legacy business (underground/surface mining) fell 20% during the year, while the firm’s backlog fell to $2.6 billion from $3.3 billion. Though the numbers were mostly downbeat, management provided some positive commentary regarding both the US and China. With regards to the US, management explained:
“Despite this depressed outlook, there is the potential for upside. Natural gas prices in the U.S. have been improving and should continue moving toward the cost of replacement, which the Company estimates is above $4.00 per million BTUs. As a result, power generation should continue switching back from natural gas to coal, but it is not expected that all of the volume losses will be regained. However, the upside can be extended by utilizing the greater excess capacity available in the coal-fired generating fleet. Exports from the U.S. will be at their second consecutive record level in 2012, and customers are investing in port expansions that can double export capacity over the next five years.”
We’ve long warned about long-term weakness in the US coal market, but Joy Global seems confident that boosting export capacity will strengthen aggregate coal demand. We simply don’t believe that natural gas prices will increase enough to justify substitution toward coal. Given the enormous supply of natural gas available in the US, as well as the continued desire to switch to cleaner energy, we think coal faces a steep, uphill battle.
As for China, the company mentioned that it sees spending re-accelerating:
“Additionally, there are signs of improvement in China. For example, fixed asset investment for infrastructure grew 30 percent year on year in September, largely aided by the government’s $157 billion of stimulus focused on infrastructure. Electricity demand is a more discrete measure of economic and industrial activity, and it rebounded 6 percent in October over last year after recording only minimal growth for all of the third calendar quarter.”
If China returns to a more-robust industrial growth rate, demand for materials and thus mining equipment could recover.
Caterpillar (NYSE: CAT), which owns competitor Bucyrus, wasn’t too positive on mining when it lowered its long-term forecast in November. It appears the Bucyrus integration is going mostly as planned, but it hasn’t been as accretive as the firm would have liked. Global mining capital expenditures could remain depressed for the next few years. As a consequence, the price paid for the Bucyrus acquisition might continue to look high as near-term returns may be muted.
Overall, we didn’t find the guidance particularly good, and management addressed several of the same issues we’ve pondered about US and Chinese demand. Cash flow generation remained fairly solid, with operating cash for the year falling just 7%, to $464 million. The company intends to keep capital expenditures modest ($200 million) during fiscal year 2013. Restructuring savings could help mitigate operating-margin pressure, but we still expect earnings to be fairly lackluster. We believe Joy Global’s shares are fairly valued, and thus do not warrant inclusion to the portfolio of our Best Ideas Newsletter.
By RJ Towner – December 14, 2012