Joy Global and Caterpillar Digging Up Long-Term Value in Mining
The near-term picture is cloudy, but we still believe the long-term picture for mining equipment manufacturers looks solid.
Mining equipment manufacturer Joy Global's (JOY) stock price has fallen more than 40% from its high earlier in the year, while Caterpillar (CAT) has seen a slide of its own, owing primarily to its increased exposure to mining end markets, in our opinion; the business now constitutes roughly 30% of total revenue and nearly half of operating profits. While the near-term picture is still clouded by weak mined commodity prices, slowing Chinese economic activity, and low U.S. natural gas prices, we believe the problem for these two key equipment manufacturers is a cyclical downturn rather than a secular shift. If we're wrong and the United States makes a more permanent shift away from coal while China's economy takes a step down the long-term growth ladder, these firms' results would certainly suffer, but we believe the companies' lofty profitability and solid stream of aftermarket sales opportunities will help to buffer earnings volatility. We also think the market is already pricing in a good amount of this potential bear-case scenario. We continue to believe a wide economic moat and more diversified revenue stream separate Cat from its peer, although Joy's valuation also seems palatable based on our discounted cash flow analysis.
Coal Demand Weak, but Should Improve Long-Term
Commodity demand has suffered over the recent past. Slowing Chinese fixed-asset investment growth coupled with low U.S. natural gas prices has driven down the average prices of coal, copper, and iron ore compared with year-ago levels for three straight quarters. Perhaps not surprisingly, the stock prices of two of the largest mining equipment manufacturers, Joy Global and Caterpillar, followed suit, as machinery orders at Joy have seen a sharp negative reversal from earlier in the year, while Cat has reported declining bookings as well.
Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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