Joy Global Inc. (NYSE:JOY) like the rest of the mining equipment sector, has fallen out of favor with investors and the market during the past few months. However, I feel that now, Joy’s share price sits at a level where many of the headwinds facing the company are priced in.
Personally, I hold a small position in Joy Global and have done since late last year. I was first attracted to the company when I stumbled across a clip of the company’s CEO, Mike Sutherlin on the CNBC show Mad Money. Mr. Sutherlin was trying to reassure investors after a 40% decline in the stock price during the first half of the year. It turns out that a large part of these declines was related to managements decision to focus on cost cutting rather than growth, which at the time seemed like a bad decision. However, right now this decision looks like it was a prudent decision to make.
Joy Global’s main demographic
Joy Global Inc. (NYSE:JOY)’s main demographic is the coal mining sector, and the company has been unable to escape the attrition currently affecting this industry as global coal demand stagnates. That said, consumption of coal in both China and India is expected to grow at double-digits rates for the next few years, which will fuel demand for the commodity. Still, within developed nations there is a strong move away from coal due to the environmental impact burning coal has on planet. Having said that, Joy is unlikely to run out of business from the sector any time soon. Indeed, Chinese coal consumption hit a high of 4 million short tons per year during 2012, more than doubling over the space of decade.
Anyway, aside from the coal market and the demand for new equipment, Joy Global Inc. (NYSE:JOY) gets a large portion of its revenue from aftermarket services. Indeed, demand for the company’s aftermarket experience kept the company profitable throughout 2008/2009, when many peers were catapulted into losses.
This brings me onto the most exciting point about Joy Global Inc. (NYSE:JOY), the company’s cash generation. In particular, throughout the financial crisis, Joy was still cash generative, churning out $270 million in cash during 2009 and $343 million during 2010 – Joy did not borrow during this period.
Joy Global’s comparison with Caterpillar
In comparison, Joy Global’s sector leader, Caterpillar Inc. (NYSE:CAT) haemorrhaged cash throughout this period and had to raise nearly $6 billion in debt to fund operations.
So, it is probable that Joy Global Inc. (NYSE:JOY)’s performance during the next few years will mirror that of 2008/2009, a period of strong cash generation and consistent profitability for the company.
Management authorizes share buyback
What’s more, management recently took the decision to authorise a $1 billion share buyback over several years. $1 billion will allow the company to retire around 17% of its issued share capital at current prices, the company’s overly depressed stock price should only assist the management in buying back more stock. The company carried out a similar operation back in 2007, reducing the number of shares in issue by 16%, which resulted in the company’s stock price and earnings per share rocketing to new highs when the mining market returned to growth during 2010.
Managements decisions to launch multi-billion dollar stock buybacks during periods of excessive stock price depression are one of the reasons Joy looks like a great company. After market services are the other point. All in all, Joy Global Inc. (NYSE:JOY) looks like a great play.