Weak US coal markets, supplier challenges cloud near-term outlook July 26, 2007 Goldman Sachs
What's changed
Joy Global - a leading mining equipment supplier - announced that continued weak US coal prices and operational difficulties have lowered its 2H2007 earnings outlook by $0.15-0.20, with potential for an additional $0.10-0.15 hit if a contingent liability payment related to delivery delays in China has to be made. We are lowering our FY2007-2009 EPS estimates to $2.87/ $3.65/ $4.20 from $3.05/ $3.80/ $4.30 and our target to $53 (14.5x 2008 EPS) from $55 and maintain our Sell rating. Our new FY2007 estimate assumes no contingent liability payment is made.
Implications
About two-thirds of the JOYG shortfall is operational difficulties associated with a fabrication subcontractor start-up in China and a component supplier in the US. CAT, CNH and TEX also reported supplier issues in 2Q and we have modestly lowered our FY2008-09 JOYG incremental margin assumptions as a result. BUCY, AG and DE also may be impacted, though supplier challenges overall are expected to remain a minor, not major issue. Another third of the JOYG shortfall relates to continued weak US coal prices as producers continue to defer aftermarket and original equipment purchases. Our new estimates assume weakness persists through winter 2008, though extreme weather or hurricane-induced US natural gas supply disruptions would accelerate a recovery. BUCY reports next week and is likely to be impacted also, but to a lesser degree given (1) lower profit derived from US underground coal, (2) more conservative guidance on a market recovery, and (3) potential offsets from higher DBT merger synergies.
Valuation
Our $53 target assumes 14.5x 2008 EPS.
Key risks
More extreme (or long-lasting) supplier disruptions or commodity price weakness. |
