Investopedia: Joy Global Fills A Gap

With Caterpillar's (NYSE:CAT) acquisition of Bucyrus making it a soup-to-nuts provider of equipment to the mining industry, the question has lingered as to how Joy Global (Nasdaq:JOYG) would respond. Would Joy Global consider a merger with another global equipment company like Komatsu (Nasdaq:KMTUY.PK) or Atlas Copco, or would it try to buy or build its way closer to parity with Caterpillar's offerings? 

Right now, it looks as though Joy Global is taking the second approach.

Making a Deal with Rowan
Joy Global and Rowan (NYSE:RDC) announced Monday morning that they had reached an agreement whereby Joy Global would acquire Rowan's LeTourneau Technologies business. Rowan had been looking to sell this business, and the purchase price of $1.1 billion is a reasonable premium to the $700 million to $900 million range that many analysts had applied to the business.

At $1.1 billion, Joy Global is paying about 10.5 times trailing EBTIDA and perhaps even less on a pro forma basis if Joy Global's assumptions about synergies prove accurate.


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Komatsu And Joy Global?

I heard an odd rumor the other day ... namely that Komatsu (Nasdaq: KMTUY) would consider taking a run at Joy Global (Nasdaq: JOYG) in an attempt to basically match Caterpillar's (NYSE: CAT) acquisition of Bucyrus and create another highly vertically-integrated mining company.

On the very outermost surface, it makes sense. Komatsu is big enough that it could conceivably do a deal, and Komatsu does have a relatively large business in trucks, haulers, shovels and other above-ground equipment useful in mining, as well as construction equipment that I'm sure has dual-use utility in areas like mining. Moreover, Komatsu has a pretty respectable presence in the emerging markets where a lot of mining activity is occurring. The only thing the combination of Komatsu and Joy Global would lack is underground trucks/loaders and drills.

Still, I don't buy it. Quick - name the last big acquisition made by a Japanese company. That's the problem ... Japanese companies by and large don't buy other companies and it's even less common in the industrial sector. I don't know if there is a fear of a culture clash, an arrogance that a foreign company would have little to offer, or simply an understanding that most deals don't work. Whatever the case, it is pretty rare for Japanese industrial companies to step up and buy large American industrial companies.

With that in mind, it makes the acquisition prospects of Joy Global a little ... interesting. Hitachi (NYSE: HIT) has some of the same above-ground machinery as Komatsu, but also happens to be a Japanese company. And while Liebherr has some above-ground mining business, that would be a pretty big swing for a company of Liebherr's size, particularly since it is private and can't really use equity to do the deal. Sandvik complements Joy Global in a few niches but overlaps in others, and probably wouldn't be interested.  

Atlas Copco (Nasdaq: ATLKY) might be a darkhorse to consider, though.  Atlas's mining business is highly concentrated (drills, underground vehicles, and such), but Joy Global would certainly be a means of taking a larger step into a sector that is clearly benefiting from booming cap-ex now and for at least the next few years. Atlas is just slightly smaller than Komatsu in market cap terms and could likely afford the deal. It would obviously leave a gap in some of the above-ground equipment niches, but not so much so that it would negate the logic to a deal.

So, there you have it ... Although it makes a certain amount of sense to hear rumors that Komatsu would consider buying Joy Global, I'd argue it's even more likely that Atlas Copco would be the bidder if Joy Global were to get a takeover offer. Time will tell, though, and the most likely outcome is probably no deal at all.

Joy Global A Mix Of Performance And Scarcity

Caterpillar (NYSE:CAT) did Joy Global (Nasdaq:JOYG) no favors from a competitive standpoint when it agreed to buy Bucyrus, but almost certainly added scarcity value to what had already been a hot and popular (if volatile) way to play the growth in global commodity demand. That is bad news for value-oriented investors as it will be even trickier to identify the right times to buy and sell this stock. 

A Solid End to a Basing Year
Joy Global managed to produce a solid end to an unspectacular year. Revenue rose 9% from the year-ago level, with good balance between its two major operating segments. Underground equipment sales rose over 8%, while surface equipment sales increased 10%. Slicing the numbers differently, original equipment sales were basically flat, while aftermarket sales increased 16% and made up nearly 60% of revenue. That revenue figure was well ahead of consensus expectation, so it is unlikely that many investors will quibble with the fact that Joy Global produced a book-to-bill ratio of nearly one, as the company saw a 53% jump in order bookings.

Profitability was strong this quarter. Gross margin improved over 100 basis points from last year, while the operating margin increased by 250 basis points. That is powerful operating leverage relative to the revenue growth, though the company almost certainly got a benefit from the steel price environment that has bedeviled producers like Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD).

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Caterpillar Now A Miner Major

At least one major global corporation is making a very large, very public bet that growth in commodity exploration and extraction is here to stay. Caterpillar (NYSE:CAT) announced a large deal on Monday whereby it is buying mining equipment maker Bucyrus (Nasdaq:BUCY) for $8.6 billion in cash. With this deal, Caterpillar will now get upwards of 20% of its revenue from the mining category and will become the only player in the world that touches every major category of mining equipment. 

The Proposed Deal
By the terms of the deal, Caterpillar will pay $92 per share in cash to the holders of Bucyrus stock. That is a net price tag of $7.6 billion and a 32% premium to Fridays' closing price. This is a robust price for Bucryus by almost any standard. Not only is this is 22% premium to the 2008 boom-time high in the stock, but it values Bucyrus at a trailing EV/EBITDA of over 15, a future EV/EBITDA of nearly 12 and more than double the 2011 revenue estimate for the company. To put this in context, 8 to 10 times EBITDA is generally considered to be a quite healthy forward multiple for this type of company.

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Joy Global Digs In

Is the mining world getting more rational? That seems to be a fair question, when looking at Joy Global's (Nasdaq:JOYG) recently-announced earnings. A company like Joy would typically see revenue and margins soar in the boom times, and then come crashing down when commodity prices fall again. This time, however, the company seems to follow a more stable trajectory that could be a positive sign of things to come. 

The Quarter that Was
It was not a great fiscal quarter for Joy Global. Sales fell more about 11% from the year-ago level (and 5% sequentially) as the company sold fewer machines in its underground mining business. Not only did delays relating to the World Cup affect business in South Africa (a major mining country), but the company also seemed to feel the flow-through from a slowdown in orders from coal companies (prompted by the tough market s of a year or so ago). Although investors expected a negative comp, Joy did miss the consensus estimate by about $25 million. 


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Nucor Not In The Clear

After a few years as an equity analyst, you get a little jaded about management guidance. Some managers are perpetual optimists who always promise and never deliver. Others are more like perpetual Eeyore's and never see anything good happening. 

And then there is the management of Nucor (NYSE:NUE). In all of the years I have paid attention to this company, I have never known management to be anything less than forthcoming and straight-shooting, if somewhat conservative. So when the CEO of Nucor expresses concern about the near-term (six to 12 months) outlook for the economy and steel markets, I tend to listen. 



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Ode to Joy Global

It is practically an investing meme now that investors should focus on the "pick and shovel" plays for major investment themes. I suppose you can take that advice very literally in the case of Joy Global (Nasdaq:JOYG), as this leading mining equipment company is very much a pick and shovel play on ongoing theme of global commodity exploitation.


The Quarter That WasAlthough Joy Global did not have a superb quarter at first glance, the context is important. Revenue was down 3% and operating income was down about 4%, but those results were significantly better than analysts expected. With equipment orders up about 43%, the backlog up by double-digits since the beginning of the year and a second straight quarter of a book-to-bill ratio above 1, there was no shortage of reasons to be pleased with the company's quarter.


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