Steve Castellano Ascendere Associates LLC [email protected]Page 1 Ascendere Associates LLC December 28, 2009 Steve Castellano [email protected]Joy Global, Inc. (NasdaqGS: JOYG) Sector: Industrials Industry: Construction, Farm Machinery and Heavy Trucks Key metrics look very compelling for JOYG Joy Global company ranks very high on several key characteristics that we look at, including relative value to its peers on a ROIC- adjusted basis and ROIC momentum and other fundamental metrics. In addition, its balance sheet is strong with $472m cash, $544m debt for a 5.3% net-debt-to-total-capital ratio. But ROIC has likely peaked in the short term But improvements to ROIC may have temporarily peaked in the latest quarter and fiscal year ending 10/31/2009 as industrial production in China and India show signs of moderating following a surge of commodity imports, and industrial production in OECD countries have yet to show signs of sustainable demand. In addition, the stock has seen a nice run from its 3/2/2009 close of $15.75 to a recent price of $54, a return of about 244%. This is about 3x the 82% return of the S&P 400 Industrials Index over the same period. Despite a near-term likely peak in ROIC, CEO Michael Sutherlin gave reason for optimism during the 12/16/2009 conference call: "There may be continued uncertainty about the timing and the early strength of recovery in the OECD countries but there is no doubt that we are near and moving closer to the start of that recovery." He also said that customers are starting the processes for the next round of mine expansion, capex announcements have been up significantly, and customers continue to validate engineering and reconfirm delivery slots for projects previously put on hold. Given long order lead times, it could be a year before a resurgent global economy could translate into sales. LTM FY+1 FY+2 LTM 5yr Avg JOYG Insider Stock Price $53.67 EPS: 4.41 $ EPS: $2.95 EPS: $3.48 ROE: 67.5% ROE: 58.4% Ownersh 0.9% Market Cap / Shares EBITDA/ EBITDA/ # of ($B) $5.5 / 103 P/E: 12.2 P/E: 18.2 P/E: 15.4 Capital 58.8% Capital 45.8% Analysts 15 EBIT EBIT P/B 6.8 P/CF 7.3 P/CF 9.9 P/CF 8.8 Margin 19.5% Margin 17.0% Debt/Cap: 40.1% Income Income Beta 2.31 P/S: 1.5 P/S: 1.9 P/S: 1.7 Margin 12.6% Margin 11.5% Div Yld: 1.3% Description: Joy Global, Inc. is a manufacturer and servicer of mining equipment used in the extraction of coal, copper, iron ore, sands and other materials. About half of its sales are generated in the United States, with the balance coming from Europe, Australia and the rest of the world. This $5.5b market company is a constituent of the S&P 400 Index. Joy Global company stands out in the Industrial Sector for its level and momentum in ROIC, strong balance sheet and other key fundamental metrics. However, ROIC expansion has probably peaked for the short-term as the global inventory restocking theme may largely played out. Applying average revenue and EBITDA consensus estimates along with some conservative assumptions implies a $45 12-month stock price target, far below the consensus average estimate of $63. However, the consensus high target price of $70 or higher is reasonable in a scenario of a resurgent global economy. In our opinion, applying a probability spread of 50-40-10 percent to scenarios reflecting a $70-$45-$30 valuation seems reasonable, which justifies a 12-month target price of $56 for now. Our scenario analysis reflects our view that it is a slightly more defensible position to be optimistic on a global recovery than not. Over time, the probability of an improving global economy could increase, thereby moving us to justify a higher valuation. In our opinion, JOYG is not a bargain at the current level, but so are neither many other Industrial stocks. Given its strong fundamental ranking and reasonable probability for improving economic drivers, JOYG is probably one of the best mid-cap stocks to own in the Industrial Sector.
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Joy Global, Inc. - Stands Out as the Best Midcap Industrial Stock
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Ascendere Associates LLC December 28, 2009 Steve Castellano [email protected] Joy Global, Inc. (NasdaqGS: JOYG) Sector: Industrials Industry: Construction, Farm Machinery and Heavy Trucks
Key metrics look very compelling for JOYG Joy Global company ranks very high on several key characteristics that we look at, including relative value to its peers on a ROIC-adjusted basis and ROIC momentum and other fundamental metrics. In addition, its balance sheet is strong with $472m cash, $544m debt for a 5.3% net-debt-to-total-capital ratio. But ROIC has likely peaked in the short term But improvements to ROIC may have temporarily peaked in the latest quarter and fiscal year ending 10/31/2009 as industrial production in China and India show signs of moderating following a surge of commodity imports, and industrial production in OECD countries have yet to show signs of sustainable demand. In addition, the stock has seen a nice run from its 3/2/2009 close of $15.75 to a recent price of $54, a return of about 244%. This is about 3x the 82% return of the S&P 400 Industrials Index over the same period. Despite a near-term likely peak in ROIC, CEO Michael Sutherlin gave reason for optimism during the 12/16/2009 conference call: "There may be continued uncertainty about the timing and the early strength of recovery in the OECD countries but there is no doubt that we are near and moving closer to the start of that recovery." He also said that customers are starting the processes for the next round of mine expansion, capex announcements have been up significantly, and customers continue to validate engineering and reconfirm delivery slots for projects previously put on hold. Given long order lead times, it could be a year before a resurgent global economy could translate into sales.
Description: Joy Global, Inc. is a manufacturer and servicer of mining equipment used in the extraction of coal, copper, iron ore, sands and other materials. About half of its sales are generated in the United States, with the balance coming from Europe, Australia and the rest of the world. This $5.5b market company is a constituent of the S&P 400 Index.
Joy Global company stands out in the Industrial Sector for its level and momentum in ROIC, strong balance sheet and other key fundamental metrics. However, ROIC expansion has probably peaked for the short-term as the global inventory restocking theme may largely played out. Applying average revenue and EBITDA consensus estimates along with some conservative assumptions implies a $45 12-month stock price target, far below the consensus average estimate of $63. However, the consensus high target price of $70 or higher is reasonable in a scenario of a resurgent global economy. In our opinion, applying a probability spread of 50-40-10 percent to scenarios reflecting a $70-$45-$30 valuation seems reasonable, which justifies a 12-month target price of $56 for now. Our scenario analysis reflects our view that it is a slightly more defensible position to be optimistic on a global recovery than not. Over time, the probability of an improving global economy could increase, thereby moving us to justify a higher valuation. In our opinion, JOYG is not a bargain at the current level, but so are neither many other Industrial stocks. Given its strong fundamental ranking and reasonable probability for improving economic drivers, JOYG is probably one of the best mid-cap stocks to own in the Industrial Sector.
JOYG looks fully valued on current consensus estimates We get a $45 12-month target and a present value of $41 by applying consensus average estimates for revenue and EBITDA and extrapolating them over time in a fairly conservative DCF model, which assumes a 12.1% WACC and a 2% terminal growth rate. Other assumptions include single digit revenue growth following a surge to the mid-teens in 2012, an EBITDA margin close to 19% over time, about 9% long-term earnings growth, continued improvements to working capital management in the near-term and debt/capital roughly staying in the 30% range. This compares to a range of $48-70 and an average of $63 among 11 sell side analysts. This $45 target represents a 14.6x PE on an EPS estimate of $3.08 (versus consensus at $2.95) for FY2010. In comparison, over the last 5 years JOYG has traded at 4.5-39.2x and averaged 20.2x on NTM consensus EPS. This target also assumes an 8x multiple on FY2010 EBITDA of $537m, versus a 5-year range of 2.5-18.1x and a rough average of 9.6x. Detailed assumptions can be viewed on our website. In order to get to the present stock price of $54 (18.3x NTM EPS) using consensus average estimates as above, we would have to assume a 11% WACC and a 3% terminal growth rate. In order to get to a $63 average consensus target price using consensus estimates (21x NTM consensus EPS), we must reduce our market risk premium to 3.6% from the 6% we are using, which would bring down the WACC close to 9%. Or we would have to adjust the terminal growth rate to almost 5%. What needs to happen for JOYG to reach the sell-side high target of $70. In order for JOYG to reach a consensus high $70 target while assuming a 12% WACC and 2% terminal growth rate, there would have to be material upside revisions to revenue growth, margin expansion and earnings growth assumptions currently implied by the current consensus average. This scenario would have to assume a significant global economic expansion, which is certainly possible if OECD countries start resuming some level of expansion along with a resurgent China and India. In detail, a $70 target could imply 13% average annual sales growth over the next 5 years, gross margin expansion to 32.4% from 29.2%, SG&A margin improvement to 11.6% from 12.6%, EBITDA margin improvement to 22.5% from 18.1% and expansion of one ROIC metric to 30.9% from 16.2% currently. EPS assumptions would probably have to move closer to $4.53 in 2011, versus the current average of $3.48 and high of $3.98. There could be material upside to this $70 target assuming that some kind of market exuberance could justify a higher longer-term terminal growth rate and lower market risk premium. JOYG an attractive option for portfolio managers looking for a mid-cap industrials stock At a current price of $54, JOYG is not a bargain but with its strong balance sheet and room for further upward estimate revisions as analysts increasingly anticipate a resurgent economy, this is a good stock to hold on to. Fundamentally justified downside risk appears to be $41 (or $45 in 12 months) in the near-term using conservative long-term assumptions, especially in view of recent capex increases by JOYG customers. Downside to $30 could be a possibility in an economic environment where EPS decline to $2.70 in FY2011 (versus the $3.48 average). It is not a stretch to view $70+ as a valid target if momentum builds in the OECD and emerging market countries. While still anything could happen to our global economy, it is our position given the various data points coming in that it's a more defensible position to be cautiously optimistic rather than fearful. Applying a matrix of target values and best guess at the likelihood of these targets occurring (10% x $29, 40% x $45, 50% x $70 = $56), JOYG should be considered a solid hold in a diversified mid-cap portfolio with ample room for upside. For details on the models and assumptions used to create this report, please visit us at www.ascenderellc.com. Risks Ascendere Associates LLC makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this report. Investing in JOYG or any equity entails a high degree of risk. This report is not a solicitation to buy or sale any securities.
About Ascendere Associates, LLC J. Stephen Castellano – is the owner of Ascendere Associates, LLC, an equity research and financial consulting firm. Steve has over 10 years of experience in equity research. At PaineWebber, Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from Oberlin College (1993). Steve’s career history is highlighted below:
Ascendere Associates, LLC (2009-Present)
Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)