Joy Global Inc. (JOYG): End markets still revving up, raising estimates and target - Goldman Sachs - May 30, 2008
What's changed
Conclusions from FY2Q08 JOYG earnings:
(1) mining equipment demand continues to improve with orders of $1.2 bn and a 1.5x book-to-bill 20% above our estimates,
(2) margin performance and outlook for recently acquired Continental is also ahead of our estimates,
(3) operating leverage was below expectations and expected to remain lackluster in 2H08 due to growth initiatives and higher OE vs. aftermarket, but should improve in FY2009, and(4) JOYG is confident it can roughly double price realization to ~+9% in FY09 from ~+4% in FY08 to offset steel cost inflation.
We are lowering our FY08 EPS estimate to $3.33 from $3.45, with higher FY2H08 estimates offset by $0.20 of FY2Q charges. We are also raising 2009-10 estimates by 3%/ 10% to $4.50/ $5.45 due to 10%/ 15% higher sales forecasts driven by stronger end markets, pricing, and capacity expansion. We are raising our 6-month price target by 10% to $87 based on 11.5x 2009 EV-EBITDA.
Implications
We remain bullish on global coal, metals and oil prices given low inventories, challenges of supply expansion given political restrictions on re-investment, and power generation expansions. GS coal and base metals analysts forecast global mining company cash flow to rise 40%+ in 2008-09, which will sustain rising demand for mining equipment through 2010 at least, in our view. We prefer Buy-rated Bucyrus due to greater upside to consensus estimates (GS +10%), more consistent execution, and a stronger position in the dragline market, where demand is expected to accelerate in late 2008, early 2009.
Valuation
JOYG is at 18x 09E P/E and 11x EV/EBITDA, or premiums of 6%/ 2% vs. BUCY vs. closer to parity recently.
Key risks
Supply chain bottlenecks, raw material pressures. |
