Joy Global Inc. (JOYG): Fundamentals strong, but so is valuation - Goldman Sachs - March 07, 2008
What's changed
JOYG recurring FY1Q2008 EPS of $0.64 was in-line with GS, but below consensus of $0.65, with EBIT 1% above GS on lower corporate expense (+$0.01) offset by higher interest & other (-$0.01). More importantly, orders rose 54% yoy to $870 mn – well above our estimate of $775 mn – which suggested that the intensity of demand for mining equipment is rising above previous expectations. Book-to-bill of 1.4x was highest since FY1Q2005, with production capacity booked into 2009. Our 2008 EPS estimates are unchanged, but we are raising 2009-10 EPS estimates to $4.35/$4.90 from $4.25/ $4.80 due to accelerating demand. We are also raising our 6-month target from $65 to $66 (15x 2009E P/E, 10x 2009E EV/EBITDA).
Implications
We maintain our Neutral rating on JOYG as our bullish view of the global commodity reinvestment cycle is offset by healthy near-term valuation, with JOYG now over 10x 2009E EV/ EBITDA, 4% above our target and at a 19% P/E premium to the oil service group vs. in-line historically. We prefer Buy-rated Bucyrus given more attractive valuation, potential upside to merger synergies with DBT and a stronger position in the dragline market, which we think could see an acceleration in orders in late 2008 or early 2009.
Valuation
JOYG is at 16x 2009E P/E and 10.2x EV/EBITDA – premiums of 1%/ 5% to closest peer BUCY – and at a 19% premium to oil service peers (BHI, HAL, SLB, BJS, CAM, FTI, NOV, SII, WFT) vs. in-line historically.
Key risks
Supply chain bottlenecks and delays in the start-up of new production capacity in China; slower global economic growth. |
