Risk, Reward Balanced at JOY Global - Analyst Blog

On April 1, we issued an updated research report on mining equipment manufacturer Joy Global Inc. JOY. JOY Global stands to benefit from the expected revival of global steel and coal demand. However, increasing regulatory mandates might impact the long-term demand of mining equipment in the U.S.

Joy Global, a Zacks Rank #3 (Hold) stock, reported earnings of 49 cents per share in the first quarter of fiscal 2014, missing the Zacks Consensus Estimate of 64 cents by 23.44% on lower demand.

However, the global mining outlook looks promising as improvement in global steel and copper production is expected to drive demand for mining equipment in the near term. But the prevailing commodity surplus environment will put the reins on demand for a while and impose downward pressure on prices of mining equipment.

Sensing difficult times, management at Joy Global has implemented several strategies to optimize its cost structure and realign production capacity to cope with sluggish customer orders, as well as to stay competitive amid the ongoing global slowdown.

Joy Global is developing new products to expand its product offering and satisfy varied customer demand. Joy Global's low seam longwall system allows customers to mine lower seams down to 1.3 meters, improving the production rate by 40% and also lowering man power usage by 70%. In the fiscal first quarter 2014, the company received a new order for its low seam longwall system.

Joy Global's prospects are to a large extent tied to the coal markets. Nearly 62% of Joy Global's total revenue comes from coal-mining customers. As a consequence of stringent government regulation and growing awareness regarding the pitfalls of excessive coal usage, we notice a steady decline in fresh investments in coal-fired power plants. The decline in coal demand and consequently in mining machineries can impact the sales volume of the company.

In addition, Joy Global operates in a highly competitive environment. For example, one of the largest operators in the mining equipment industry Caterpillar Inc. CAT with its varied product offerings and its financial strength can pose severe challenges to other players in the business.

Investors interested in the mining equipment industry may consider stocks like The Manitowoc Company, Inc. MTW and Komatsu Ltd. (KMTUY) among others. Both these stocks carry a #1 (Strong Buy).