Are Short Sellers Wrong Again? Joy Global’s Value
Bets against Joy Global (JOY), the smaller rival to Caterpillar (CAT) have spiked of late. Short interest in the mining equipment and servicing firm has more than tripled in 2013. As a percentage of Joy Global’s float, shorts are also more than triple the level for Caterpillar.
It’s not exactly a secret what ails both Joy Global and Caterpillar, whose stock prices are down 22% and 7% respectively in 2013. Amid a sluggish global economic recovery, the need to pull more commodities out of the earth has fallen off sharply, pushing prices down and causing mines to close.
In its just released third quarter (through July) operating results, Joy reported a 75% drop in new order bookings. Net sales in the quarter were $1.3 billion, down from $1.4 billion a year ago.
If you’re looking for a quick score in weeks or months, you might lean toward going short Joy Global. But if your investment research is geared more toward long-term value plays, there’s an interesting counterpoint to all the short interest of late. Some top-notch value managers were recently initiating or adding to their Joy Global stakes.
Could short sellers be wrong again? In recent days, YCharts has reported on stocks that defied short sellers this year, including GameStop (GME), Deckers (DECK), R.R. Donnelley & Sons (RRD) and Pitney Bowes (PBI).
In its two highly rated mutual funds, Tweedy Browne increased its stake in Joy Global from a combined 2.1% at the end of the first quarter to 4.1% of assets at the end of the second quarter. Brian Rogers, manager of the standout $28 billion T. Rowe Price (TROW) Equity Income mutual fund, increased the fund’s stake to about half a percent. Granted that’s not big enough to crack the top 25 for the portfolio (JP Morgan Chase (JPM) was the largest holding at the end of June, at 2.8) but according to Morningstar, the big fund owns 2.4% of Joy’s outstanding stock, the largest stake among individual mutual funds. Artisan MidCap Value initiated an 0.8% position in Joy Global in the second quarter and Vanguard Windsor II also opened a position. (An important note: all those moves were made during the second quarter, before Joy Global’s most recent financial release.)
As befits their value bent, these managers are not demanding an immediate return on investment; they typically hold onto stocks for four to six years. Artisan MidCap Value’s 46% annual turnover rate is the highest of the group, and that’s still about half the average for actively managed stock funds.
So what’s a long-term value investor focusing on? Unless you believe we’re in for some protracted commodity bear market, you’ve got a solid valuation story, based on PE ratio and oher factors, not just on some relative basis, but in absolute terms:
Joy Global management is on record that it doesn’t expect any demand shift the rest of this year given that there is plenty of supply already above ground. For example, China production of thermal coal has fallen 4% this year, as the cost of domestic mining makes it less appealing than importing coal. Chinese coal imports are up 15% this year. But Joy Global expects a shift back toward more domestic production in 2014, as Chinese stockpiles are worked down. Meanwhile, U.S. coal prices have staged a bit of a rally off their depressed levels, rising nearly 20% since the start of the third quarter.
While new sales have cratered, Joy Global derives more than half its revenue from its after-market repair and maintenance operations. That ongoing contract business helps to absorb some of the cyclicality when the economic cycle puts a dent in new equipment sales. While new equipment bookings sank 76% in the third quarter, after-market orders fell a less calamitous 13%. In a research note following the release of third-quarter results, William Blair said it expects new orders to stabilize from this level, given the fact that after-market represented about 90% of orders in the third quarter. William Blair’s $65 price target is more than 30% above Joy Global’s recent price.
And it’s not as if Joy Global is in financial straits. While earnings have obviously taken a hit, cash in the first nine months of the fiscal year hit $486 million, an increase from $454 million during the prior nine months. In its third-quarter report, management announced plans to repurchase up to $1 billion over the next three years.
In addition to the on-hand cash, a healthy pension is expected to allow Joy Global to reduce its pension funding costs by $115 million next year. Lower capital expenditures and a continued focus on operational cost cutting will also free up more money.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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