Joy Global Inc. (JOYG): Raising price target and estimates on improved order outlook - Goldman Sachs - 12/20/07
What's changed
We are raising our 12-month price target to $65 (16X 2009E P/E) from $59 as we shift valuation focus to 2009 and increase our 2009 EPS estimate to $4.05 from $3.95 on stronger volume assumptions. Global mining equipment demand--particularly in coal--is intensifying, with the company's book-to-bill rising to 1.3X for the first time since early 2005 on +16% yoy orders in 4QFY07. We maintain our 2008 estimate of $3.45, which is 3% above the high end of guidance and 5% above consensus. We believe Joy Global incremental margins can outperform guidance as plant absorption and pricing improve.
Implications
With JOYG shares +35%-40% since early September and already trading at (1) 15X our 2009 estimates that are 8% above consensus and (2) a healthy premium to oil service stocks, it is clear to us that the shares are already discounting a healthy recovery in global mining equipment demand. Given that (1) the fiscal first quarter tends to be a soft quarter for orders, (2) we believe capacity constraints limit scope for significant upside to FY2008 estimates, and (3) slowing global growth could temper the commodity price outlook, we
prefer to wait for what we believe will be an inevitable pull-back to become more aggressive.
Valuation
JOYG is at 14.7X 2009E EPS and 9.7X EV/ EBITDA--in line with its closest peer BUCY--and at a 5% 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 are Joy Global-specific risks. Slower global economic growth could temper recent strength in international coal prices. A stronger US dollar could reduce the attractiveness of US coal exports. |
