UBS maintains its Sell rating on Joy Global Inc. JOY, saying the company still needs an earnings recovery to support debt reduction as coal challenges remain.
"We still see fundamental risk to coal and broader mining capex for 2017, and with 77 percent of the implied value based on future growth, we think the shares are pricing in too optimistic a recovery in earnings," analyst Steven Fisher wrote in a note.
Joy Global's bookings in the second quarter were better than expected, and it cited some progress on company-specific initiatives. Still, the company "indicated that bookings are lumpy and likely to come down" in the second half versus second quarter.
While the company raised its FY16 cash flow outlook by 5–10 percent, it has $1 billion in debt coming due over the next five years (2019 and 2021).
"We don't expect JOY to pay it down entirely (some likely to be termed out), but we do think JOY needs more cash flow to reduce debt to lower levels in the event that there is an extended mining downturn," Fisher highlighted.
Fisher cut his FY16 EPS estimate to $0.09, from $0.25 due to the larger than expected drag in first half from U.S. coal and the oil sands fire impact.
However, the analyst increased his FY17 EPS estimate to $0.25, from $0.10, to reflect the better than expected results in the second quarter and the potential for higher service revenues in the second half.
The analyst also raised his price target on the stock to $11 from $8.
At the time of writing, shares of Joy Global were up 1.31 percent to $22.51.
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