Joy Global Is Up 22%, But Morgan Stanley Still Sees Concerns

Joy Global Inc. JOY reported a Q2 EPS beat, with better than expected bookings of $681 million. The stock surged 22 percent following the announcement.

Morgan Stanley’s Mili Pothiwala maintained an Equal-weight rating on the company, while raising the price target from $13 to $14.

“We acknowledge a better FY16 set up following 2Q, however we continue to see risks around the 2017e outlook,” Pothiwala mentioned.

The orders for Q2 were also well above expectations. However, the analyst noted that management implied the bookings of $681 million wasn't an appropriate run rate to model and that going forward, a run rate of $500-$550 million was more likely.

Joy Global has guided to the lower end of its previous revenue and EPS guidance, although the consensus forecasts are already below the lowered midpoint.

Concerns Persist

Pothiwalla pointed out “there were concerns about the achievability of FY16 guidance, given how back-end loaded it seemed prior to 2Q. The combination of the 2Q beat and the lower guidance now help to alleviate that fear.”

On the other hand, while the Q2 free cash flow was below the estimate, management raised the FY16 free cash flow guidance from $200 million to $200-$225 million.

According to the Morgan Stanley report, although it's early for Joy Global to comment on 2017, “management suggested on the call that the higher restructuring expense slated for 2016e will result in $40-50m in carryover cost savings in 2017e.”