Joy Global finished up 7% yesterday, due principally to short covering on the better-than-expected service orders and surface margins. Sentiment on the stock is very low, as exhibited by the very high short interest (~20%), and so any positive news typically causes shares to rally.
Given that a precipitous drop in original equipment (OE) capital expenditures has weighed on the company’s stock price since 2012, the bear thesis rests on incremental pressures, including further declines in both OE and aftermarket pricing, parts and service, and ultimately normalized margin, which would precipitate further earnings reductions over the cycle.
The biggest surprise to us in the quarter was the surface mining equipment margin of 19%. Despite the challenging operating environment, the company is executing well and is on track to hit its cost-cutting targets from prior restructuring efforts. Cost savings and strength in Chile (copper mines) helped drive upside in this segment. Orders of $1.05 billion were well ahead of Street expectations (~$850 million) but benefit from about $100 million in tar sand shovel orders that will not affect the P&L until 2016. The longwall order booked last quarter in Australia will benefit 2015 results. Metallurgical coal and iron ore are the weakest commodities, and many of the smaller miners are at breakeven or unprofitable at current pricing levels.
Variability to the outlook is commodity prices, which will determine the headline and catalyst flow until the next earnings season. Joy Global only repurchased about $7 million of stock in the fiscal second quarter, after repurchasing $122 million of stock in the first quarter, so there could be upside from more-aggressive share repurchases in the second half. Management noted that the roughly $50 million Mining Technologies International acquisition will be accretive to 2015 adjusted EPS, and it is complementary with the existing 25% of the portfolio that is for hard rock mining and consistent with Joy’s strategy to expand its footprint in this category.
We tweaked our fiscal 2014 EPS estimate to the low end of the guidance range ($3.10 from $3.15), since management talked down the third quarter and is back-end loading the earnings profile into the fiscal fourth quarter, and to embed some conservatism to our estimates. At the midpoint of Joy Global’s full-year EPS guidance, the implied fourth-quarter EPS, assuming a third quarter that is not too dissimilar from the second quarter, would be $1.25. The fiscal second-quarter actual EPS were $0.76, and thus the fourth-quarter would have to exhibit a ramp-up. Despite third-quarter seasonality, our estimates call for a steadier increase; our fiscal third-quarter EPS estimate is $0.84 and our fiscal fourth-quarter EPS estimate is $1.00.
We maintain our fiscal 2015 EPS estimate of $3.75, despite a top-line sales reduction, because we increased our margin assumption. We adjusted our price target to $65, from $60. Our price target implies a multiple of 17 times our fiscal 2015 EPS estimate.