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Thursday, March 3, 2011

Ode To Joy Global (JOYG)

Yesterday Joy Global (NASDAQ: JOYG) the manufacturer of a wide variety of equipment for the mining industry reported their 4th quarter earnings which came in 11 cents below expectations. For many of JOYG's investors there was not joy in Mudville so to speak. The company saw income growth of 34% year over year which is nothing to sneeze at especially in this market, however, their ability to meet or exceed analysts' lofty earnings projections were impacted by a variety of factors beyond the company's control.

On the one hand JOYG is a global company that derives its sales from just about every corner of the world be it the US, Australia, China, India and beyond. A result of JOYG's global reach is that they can benefit from currency discrepancies by selling their products in to some areas where the currency is stronger effectively giving their bottom line a boost.

The flip side is that some of the currency advantage is offset by higher input costs as they rely on raw materials priced in US Dollars to make their products. All in all it is a convoluted chain to follow and does have an effect on JOYG but management appears to be aware of the issues and therefore I believe they can manage the risk effectively.

One of the items they cannot manage is what the mining industry calls “Force Majure” , which is a legal term of French derivation and translates loosely to superior force. A Force Majure is declared under contract when an act of God or something beyond the reasonable control of the participants occurs and the contractual obligations cannot be fulfilled on time. I am sure dear reader that you are well aware of the massive flooding that has taken place in Australia where multiple companies declared Force Majure and as a result did not take delivery of some equipment from JOYG there by impacting the quarter's earnings.

If you are a trader then you are disturbed by JOYG's miss and would dump the stock accordingly, but if you are an investor then you need to look with a different lens. JOYG has many things in its favor and appears to me to be a very good if not volatile investment with a beta of about 2.2. I consider myself to be a theme and trend style investor and I like to look for scenarios that play out over time as I cannot sit by the computer watching tick by tick to make a trade as it would drive me insane.

One of the themes I like to play is what I call the “Arms Dealers”. If you think about it dear reader, in a war there are generally two sides engaged in battle and each expends tremendous energy and money to achieve their objective. Granted at the end of the war the “spoils go to the victor”, but who profits from the war? In general a lucrative and highly profitable position is that of the arms dealer as they are not involved directly in the fighting but instead are supplying the highest bidder. I view many companies as falling in the “arms dealer” category and JOYG fits this bill quite well.

JOYG's mining equipment is marketed under both he P & H name as well as JOY. They are an old-line player and the company has been in business since 1884 meaning that they have had to navigate through many business cycles. If you travel to a mining or construction site there is a high probability that you will see JOYG equipment in use. I am sure dear reader that you are well aware of scramble for natural resources of all kinds (think congress and rare earths for example) much of which requires mining to obtain. Additionally, there is the build out in China, India and other countries looking to industrialize and bring their economies in to the 21st century. JOYG's competitors include Caterpillar (NYSE: CAT) who recently acquired JOYG's more direct competitor Bucyrus International (NASDAQ:BUCY). The market for the types of equipment manufactured by JOYG and CAT is vast and growing as a result of geo-economic and geopolitical motivations; so I believe that there is plenty of room for all the players to expand. There are other players around the world like privately held Mitsubishi and Korea's Komatsu Ltd (NASDAQ PINK SHEET : KMTUY.PK), but as stated before the equipment pie is plenty big.

One of the issues for JOYG this quarter was input costs, however, as was noted on the conference call that these costs could be passed along going forward. Moreover, as of this point in time JOYG is sporting a $2.18 Billion backlog for new equipment which is a 52% improvement year over year and it is across all business lines showing sector strength. JOYG also upped their guidance from $5 to $5.30 per share to $5.10 to $5.40.

The bottom line is that after the tremendous report from BUCY the specter of disappointment for JOYG's report was set. The traders took their cue yesterday and dumped shares, but investors can take solace in the following facts. Investors are getting an opportunity to buy a growing player on a dip as a result of the disappointment. Investors should be looking at longer term and recognize that JOYG is firing on all cylinders and management believes so as well otherwise they would not have guided expectations up.

JOYG also fares well on its metrics as a growth company. The market cap is $9.7 Billion, so it is large enough to be a sizable player but the market cap is not bloated leaving room for expansion. Many companies run in to the law of large numbers when their market cap becomes too large, meaning that it is much more unlikely for a $500 billion dollar market cap to be come $1 trillion rather than a $10 billion to grow to $20 billion. Additionally JOYG's margins are very healthy at 33% gross margins and 20% operating and are better than CAT's at 26.5% and 9.4% respectively. On a PE basis JOYG is close to CAT and BUCY but it is lower than both at the moment meaning that JOYG is less richly priced than its peers.

It is not just this author that recognizes the potential of JOYG as it was very recently added to the S & P 500. The inclusion in the index caused a huge spike in volume as all the index funds had to buy the shares to reflect the change. Even with the miss and subsequent sell off in JOYG yesterday the chart did not sustain any real damage. While JOYG dropped and came close to the 50 day Moving Average it did not even pierce it before buying came in and lifted the shares. The shares rallied back to close at $94.32 and which was above the open price of $94 and suggests that the bulls were able to overcome the bears selling pressure. JOYG closed on high volume with what could be described as a doji with upside bias on a candlestick chart. A doji generally indicates price indecision as to the direction of the underlying security and I believe that this is a result of the traders and MOMO (momentum players) guys dumping while those with a view longer than a chart tick are buying and or holding. I was a buyer of shares yesterday as I believe that JOYG will continue upward since the space they play in is both growing and new demand appears to be crawling out from under every rock, pun intended. I am looking for a 20% move up to around the $115 area where I will evaluate the prospects again. As always I will use a mental downside stop, this time at $86.48 in case my thesis is incorrect.

As a side note, if you have the chance you should check out the new documentary fillm being released on DVD on 3/8/2011 titled "Inside Job". This film was nominated for an Oscar in the documentary catergory and takes a look at the history of the events leading up to and through the financial meltdown of 2008 and forward. There is a interview on the financialsense website(MP3 Here ) that is worth a listen and gives you a preview of what is contained on the DVD. If you do get it be sure to have as many people view it as possible since it will clear up a lot of what happened leading the US in to the finacial disaster and it will make who ever watches it pretty angry about what happened and how little has been done to fix anything. The "Inside Job" DVD is available on Netflix (NASDAQ: NFLX) so add it to your queue today so it will ship out to you right after release.

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