Note: More details to come; changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: Flash Update: 4Q11 and Fiscal 2011 Earnings
Prev. Ed.: Pre Earnings Update: November 30,2011(broker material and share price are as of November 25, 2011)
Earnings Flash Update (Full Earnings Update in progress to follow)
On December 14, 2011, Joy Global Inc. announced its fiscal 2011 operational results. The company reported adjusted earnings of $1.83 per share in the fourth quarter of fiscal 2011, compared with $1.39 per share in the fourth quarter of fiscal 2010. The results of the company were $0.02 lower than the Zacks Consensus expectation of $1.85 for the quarter.
Fiscal 2011 adjusted earnings of Joy Global were $5.92 per share, compared with $4.40 per share in fiscal 2010. The results of the company were $0.04 higher than the Zacks Consensus expectation of $5.88 for the fiscal year.
GAAP earnings per share during the fourth quarter were $1.61 and its fiscal earnings were $5.72. The difference between GAAP and operating earnings in the quarter and the fiscal year emanated from the impact of discontinued operation.
Total Revenue
Joy Global reported net sales of $1,335.3 million in the fourth quarter of 2011 versus $1,048.9 million reported in the fourth quarter of 2010, reflecting a year-over-year growth of 27.3%. The upside was driven by higher contribution from the Underground Mining Machinery and Surface Mining Equipment segments, while eliminations dragged down total revenue marginally.
The actual results were a touch short of the Zacks Consensus forecast of $1,339 million for the fourth quarter.
Joy Global reported net sales of $4,403.9 million for 2011 versus $3,524.3 million reported in 2010, which reflected a growth of 25% year over year. The year-over-year increase was due to strong performance of the Underground Mining Machinery and the Surface Mining Equipment segments.
The actual results for fiscal 2011 were marginally lower than the Zacks Consensus expectation of $4,431 million.
Fourth Quarter Highlights
During the quarter under review Underground Mining Machinery as well as Surface Mining Equipment experienced year-over-year gains due to higher shipments, while sales were up in all markets.
Joy Global’s operating profit in the fourth quarter was $296.3 million versus $226.6 million in the year-ago period, reflecting a year-over-year growth of 22.2%. The positive impact from aftermarket sales, higher sales volume, and favorable manufacturing overhead absorption drove the upside.
Fiscal 2011 Highlights
Total bookings at Joy Global during the fiscal year touched the $5.59 billion mark, up a significant 44.3% from the previous year-end level of $3.87 billion. The results were driven by strong bookings in Australia, South America and U.S.
At fiscal year end, total backlog was $3.3 billion, up $1.5 billion from the prior year. The growth reflects a positive book-to-bill ratio along with contributions from the LeTourneau acquisition.
Net interest expense in 2011 was $24 million, up $7 million from 2010 levels. The increase stemmed from acquisition financing.
Financial Condition
Cash and cash equivalents of Joy Global as of October 28, 2011, were $288.3 million versus $815.6 million as of October 29, 2010.
Cash provided by operating activities during 2011 was $499.7 million versus $583.5 million provided during the previous year. The year-over-year decline in cash from continuing operations was mainly due to growth in inventory and accounts receivable, partially offset by higher net income and increased customer advance payments.
Capital expenditure in 2011 was $111 million, higher $38 million from 2010 levels. The increase was attributable to continued investments in global capacity and aftermarket service infrastructure at the company.
Guidance
Joy Global’s projection for fiscal 2012 takes into account the possible contribution from the acquired LeTourneau mining business, while the forecast excludes the pending acquisition of IMM. LeTourneau is expected to contribute $400 million to 2012 revenues and $0.41 to earnings per share.
Joy Global expects revenue to range from $5.3 billion to $5.5 billion for 2012. The company expects full-year 2012 earnings per share to rangebetween $7.00 and $7.40.
The company continues to invest in global capacity and efficiency and has thus allocated $200 million in 2012 for this purpose.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON JOY.
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed]
Joy Global Inc. is a global leader in the manufacture and servicing of mining equipment. The company manufactures underground mining equipment and surface mining equipment and offers aftermarket services.
Of the 13 firms covering the company, 9 provided positive ratings, 4 gave neutral ratings and none of the firms gave a negative rating. The Zacks Digest average target price of $103.40 ($5.02 from the last report, 31.3% upside from the current market price) ranges between $93.00 (18.1% upside from the current market price) and $112.00 (42.2% upside from the current market price).
Buy or equivalent outlook (Nine firms or 69.2%)– Target prices are in the range of $98.00 to $112.00.The firms believethat the company is well positioned to face the volatility in its commodities end markets in an uncertain macro environment.The firms believe the decision to divest the drilling business will not only enable the company to concentrate on its core operation but the divesture will provide the necessary fund to carry out the pending acquisition of International Mining Machinery Holdings Ltd. with minimal equity issuance. The firms maintaining their bullish outlook on Joy Globallike its highaftermarket exposure compared to its peers and strong revenue generation capacityon the back of consistent bookings and a firmer backlog for its products.
Neutral or equivalent outlook (Four firms or 30.8%) – Target prices are in the range of $93.00 to $97.00. The firms are positive regarding Joy Global’s acquisition of LeTourneau Technologies, but at the same timeare cautious of acquisition related risks. Theyare watchful ofoverall signals of decline in global economic growthas it can trigger a reduction in demand for mining equipments.
General Outlook
The firms continue to expect solid demand for mining equipment for the next several years. Commodity demand from emerging and developing nations is driving mining companies to increase Brownfield expansions and begin to develop new Greenfield projects. The firms expect the company’s growth to be driven by a large installed base of equipment as well as excellent global geographic coverage that will help to ease the volatility in demand for new mining equipment.
According to the Zacks Digest model, revenue is expected to increase 25.2% y/y in FY11, 20.7% y/y in FY12 and 8.2% in FY13, with a three-year CAGR of 17.8%. EPS is expected to increase 33.8%, 23.2%, and 11.3% y/y in 2011, 2012, and 2013, respectively, with a three-year CAGR of 22.4%. According to the Zacks Digest model, cash flow from operating activities is expected to increaseat a three-year CAGR of 5.8% y/y and capital expenditure to increase at a three-year CAGR of 31.0%.
November 30, 2011
Overview [Note: Only highlighted material has been changed]
Headquartered in Milwaukee, Wisconsin, Joy Global Inc. is a worldwide mining machinery and services company. The company operates in two segments. The Underground Mining Machinery segment(Joy Mining Machinery or Joy) manufactures underground mining equipment for the extraction of coal and other bedded minerals, and offers comprehensive service locations near mining regions. Its products and services include continuous miners, longwall shearers, roof supports, armored face conveyors, shuttle cars, flexible conveyor trains, continuous haulage systems, and roof bolters. The Surface Mining Equipment segment(P&H Mining Equipment or P&H) produces equipment for the extraction of ores and minerals, and provides operational support for various types of equipment used in surface mining. The segment’s products and services include electric mining shovels, walking draglines, blasthole drills, and P&H MinePro Services. The company’s fiscal year ends on October 31; all fiscal references differ from the calendar year. The company’s website is
Key investment considerations as identified by the firms are:
Key Positive Arguments /Key Negative Arguments
- Aftermarket parts and services account for a substantial portion of revenue. These have higher margins than original equipment revenue.
- Emerging markets provide substantial revenue growth opportunities going forward on account of the high demand for power and coal in these markets.
- The company’s net debt-free position allows it substantial flexibility to make acquisitions.
- The tactical investments made by the company in LeTourneau mining equipment and International Mining Machinery have expanded the reach of the company and will be accretive to earnings.
- Fresh equipment orders arising from demand in Australia, South America and Africa.
- Joy Global’s revenue and earnings are highly cyclical and dependent on commodity prices. Generally, an investment in the company yields returns during an upturn of a commodity price cycle.
- Substantial overseas exposure renders revenue susceptible to foreign exchange rate changes.
- Competition is increasing from the Chinese manufacturers.
- Consolidation of customer base can result in lower aggregate demand and services and a more competitive pricing environment.
November 30, 2011
Long-Term Growth [Note: Only highlighted material has been changed]
Out of the 13 firms covering the stock only 2 firmsgave long-term growth rates with an average of14.5%.
The company enjoys a competitive advantage as it has leading position in underground coal mining that includes the highest value equipment in an underground system and has co-leading position in mining shovels. The firms believe that the longer-term outlook for the company is positive and that commodity end markets appear to be improving (e.g., copper, international coal, and oil sands). However, the firms are of the opinion that the company’s outlook is contingent on sustained global economic growth. They also note that the global macroeconomic outlook is increasingly dependent on sustained growth in rapidly developing economies, like China and India.
According to the firms, the company will continue to benefit from increased commodity demand from the emerging markets as developing countries improve their infrastructure and consume more raw materials in the long term. They believe that approximately 80.0% of the worldwide power generating capacity that will be added in the next two decades will be built in the emerging markets. The vast majority of these new power plants will be coal fired in these countries providing the company with significant equipment opportunities. The firms also believe that the improving order trends in developed economies are an important complement to the continued strong demand from emerging markets. Additionally, they are of the opinionthat the company will invest in research & development as well as manufacturing facilities for at least the next several years.
Recent industrialization trends suggest that the customers are moving from single projects to expansion programs that have a span of four to five years and involve multiple projects. Therefore, the company expects continued strength in the demand for mining equipment and aftermarket services as the customers increase their production levels and also add to their mine expansion plans. On the whole, based on these trends, the company believes that the company is in the early stages of a long-term growth phase.
Some firms believe that the company’s life cycle management program and smart services initiatives for its aftermarket business could lead to up to 50.0% more growth per year in the company’s aftermarket business than market-related aftermarket growth. They believe that the company will likely continue to aggressively build out new service centers globally to enhance full lifetime support of its mining equipment business. Moreover, they think that the company’s ability to offer smart services could be a significant driver of increased aftermarket growth for the company.
The firms believe that the acquisition of LeTourneau Technologies will enable the company to monetize its non-core assets to secure a highly attractive price and transform itself into a pure-play offshore driller. The firms also appreciate the decision of the company to hive off the drilling business of LeTourneau Technologies as that business does not fit in the core operation of Joy Global. Most of the firms believe the company will utilize the proceeds to acquire International Mining Machinery Holdings Ltd. which will allow the company to foray into the coal mining equipment market of China.
Overall, the firms are of the opinion that the company is placed in a favorable position despite the downturn, given its large installed base of equipment, which provides more stable cash flow and reduced cyclicality compared with original equipment. Additionally, the firms believe that the company will continue to exercise prudence and caution while they pursue acquisitions that enhance their long-term growth profile through higher exposure to the fast growing emerging markets.
November 30, 2011
Target Price/Valuation [Note: Only highlighted material has been changed]
Rating DistributionPositive / 69.2%
Neutral / 30.8%
Negative / 0.0%
Digest High / $112.00
Digest Low / $93.00
Avg. Target Price / $103.40
Firms with Target Price/Total / 10/13
Risks to the target price include – increase in competition due to consolidation by other players in the industry; the LeTourneau Technologies acquisition failing to yield desired returns;and legislation or regulations that limit greenhouse gases and promote alternate forms of energyresulting indeclining demand for coal and adversely affecting demand for Joy Global's mining equipment.
Recent Events [Note: Only highlighted material has been changed]
On August 31, 2011, Joy Global Inc. reported earnings for the third quarter of fiscal 2011 ending July 29. Adjusted earnings of $1.54 per share compared favorably with $1.11 per share in the year-ago quarter. The results of the company also surpassed the Zacks Consensus Estimate of $1.50 per share. Adjusted earnings increased 49% year over year to $163.5 million in the quarter under review.
Joy Global reported net sales of $1.09 billion in the reported quarter, up 28.6% from $0.9 million in the year-earlier period. The growth was driven by higher contribution from Underground Mining Machinery (up 31%) and Surface Mining Equipment (up 24.5%), while eliminations were a marginal drag on total revenue. Sales, however, fell short of the Zacks Consensus Estimate of $1.15 billion.
On July 29, 2011, Joy Global Inc. announced that it acquired approximately 136.5 million shares of International Mining Machinery Holdings Ltd. (IMM) from the open market at a price of HKD 8.00 per share. These shares will further increase the stake of Joy Global in IMM by 10.5%, which is a leading designer and manufacturer of underground longwall coal mining equipment in China. IMM has strong domestic market positions in roadheaders and longwall shearing machines.
Also in July 2011, Joy Global entered into an agreement with TJCC Holdings Limited (TJCC) to purchase 534.8 million shares of IMM representing 41.1% of the shares outstanding. Together with the latest open market purchase, Joy Global’s stake in IMM aggregates to 51.6% of shares outstanding.
However, the purchase of shares from TJCC is subject to approval from the Anti-monopoly Bureau of the Ministry of Commerce (“MOFCOM”) of the People’s Republic of China as well as satisfaction of other customary closing conditions.
Revenue [Note: Only highlighted material has been changed]
According to the company and Zacks Digest model, 3Q11 total revenue was $1,136.3 million, up 33.7% y/y driven by higher contribution from Underground Mining Machinery and Surface Mining Equipment while eliminations were a marginal drag on total revenue.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 3Q10A / 2Q11A / 3Q11A / 4Q11E / 2010A / 2011E / 2012E / 2013EDigest High / $850.0 / $1,063.0 / $1,136.4 / $1,371.0 / $3,524.3 / $4,440.0 / $5,504.7 / $5,973.0
Digest Low / $850.0 / $1,062.7 / $1,136.0 / $1,308.0 / $3,524.0 / $4,376.6 / $5,014.3 / $5,412.3
Digest Average / $850.0 / $1,062.8 / $1,136.3 / $1,343.3 / $3,524.2 / $4,413.6 / $5,328.1 / $5,764.2
Y-o-Y Growth / -11.1% / 18.6% / 33.7% / 28.1% / -2.1% / 25.2% / 20.7% / 8.2%
Quarterly Growth / -5.2% / 22.2% / 6.9% / 18.2%
Booking and Backlog
Booking in the third quarter of fiscal 2011 grew 46.3% year over year. Original equipment bookings surged 78%, while aftermarket orders increased 22% from the year-ago level. The third quarter bookings included a benefit of $79 million from changes in foreign exchange rates. Including LeTourneau, the booking during the quarter surged 48.7% year over year.
Joy Global’s backlog at the end of the third quarter was $3.2 billion, which reflects an increase of $1.4 billion from the beginning of fiscal 2011 levels. The surge in backlog reflects positive book-to-bill ratios for both surface and underground business segments. The acquisition of LeTourneau added $227 million to the backlog in the reported quarter.
Provided below is a summary of segment revenue as compiled by Zacks Research Digest:
Segment Revenue($ M) / 3Q10A / 2Q11A / 3Q11A / 4Q11E / 2010A / 2011E / 2012E / 2013E
Underground Mining Machinery / $510.8 / $648.3 / $669.1 / $745.5 / $2,126.9 / $2,574.9 / $2,894.7 / $3,190.9
Surface Mining Equipment / $372.9 / $440.0 / $507.8 / $617.9 / $1,518.8 / $1,958.3 / $2,450.0 / $2,635.2
Eliminations / ($33.8) / ($25.8) / ($40.3) / ($42.6) / ($121.1) / ($134.2) / ($152.2) / ($158.5)
Segment details as per Zacks Digest are as follows:
Underground Mining Machinery: This segment sells underground equipment to coal mining companies, as well as other bedded materials such as gypsum, lignite, phosphate, potash, salt, and trona.
In 3Q11, order for underground mining machinery increased 17.1% year over year, accompanied by original equipment order growth of 22% and increase of aftermarket order by 13%. Original equipment orders increased in the United States, Eurasia and Australia, while Aftermarket bookings were up across all markets, led by the United States, Eurasia, South Africa and Australia.
During the reported quarter net sales of underground mining equipment rose 31% year over year. The company experienced 33% growth in original equipment shipments and 29% growth in aftermarket sales. Higher original equipment sales were attributable to increased shipments of equipment in the United States, Eurasia, South Africa and Australia, while aftermarket sales increase resulted from positive results from the entire underground mining machinery markets.