Long-term story solid, but we still see better opportunities September 21, 2007 - Goldman Sachs
What's changed
JOYG’s analyst meeting reinforced our views that (1) the long-term fundamentals for mining equipment demand are solid, (2) a recovery in demand from US coal markets (~30%+ of 2007 profit) remains a ways off, and (3) BUCY is still a more attractive stock in the mining equipment sector currently given cheaper valuation and potential upside to our street-high 2008 estimates (11% above consensus) via greater DBT merger synergies. We do not think JOYG put to rest concerns about future supply chain challenges (driver of 3Q miss), but this is more an industry-wide challenge anyway, in our view, than JOYG-specific. We believe new targets of 11% organic 5-year revenue CAGR and 2012 EPS of $6-7 are aggressive, but not unreasonable. Yet an 11x P-E on the $6.50 mid-point EPS and a 10% discount rate imply the stock is fairly valued under this “blue sky” scenario. TEX, ETN, DE and CNH remain Buy-rated and we maintain our Sell rating (sector relative) on JOYG and $49 target (14.5x 2008 EPS) target.
Implications
News at the margin from JOYG’s analyst meeting: (1) acquisition focus has increased, with entry into the mid-tier China coal market one area of potential focus, (2) debt to cap could rise on an interim basis for the right acquisition, (3) significant capacity increases will continue beyond FY2008, with capex likely at 3-4% of revenue through 2010 at least, (4) JOYG now shares BUCY’s bullish view of dragline orders, though JOYG needs a larger capacity machine to compete more effectively, (5) significant reductions in SG&A and working capital as a percentage of revenue are being targeted in JOYG’s five-year plan.
Valuation
JOYG is now at 14.5X 2008 EPS, a 5% premium to BUCY.
Key risks
A global economic downturn, prolonged weak US coal prices, supply chain disruptions, delays/ cost overruns with new capacity additions. |
