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Joy Global Inc. (NYSE: JOYG). Tyler Haida Chris Tsoukalas Aaron Czerkies Frank Damian Amin Rizwan November 17, 2011. Agenda. Company Overview Macro-Economic Outlook Industry Overview Competitors Company Performance Valuation Recommendation. JOYG Overview as of 11/16/11.
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Joy Global Inc. (NYSE: JOYG) Tyler Haida Chris Tsoukalas Aaron Czerkies Frank Damian Amin Rizwan November 17, 2011
Agenda • Company Overview • Macro-Economic Outlook • Industry Overview • Competitors • Company Performance • Valuation • Recommendation
JOYG Overview as of 11/16/11 • Current Price $88.64 • Market Cap. 8.59 Billon • 52-week range $57.48-103.44 • 1 YTD 13.8% return • 2 YTD 22.74% annualised return • 5 YTD 15.97% annualised return
Joy Global’s Business • Manufactures and services mining equipment for the extraction of: • Coal, copper, iron ore, oil sands, and other minerals. • Joy Mining Machinery- • underground mining equipment segment which manufactures underground equipment for extraction of coal and bedded minerals, and comprehensive service locations world wide • P&H Mining Equipment- • Producer of surface mining equipment for the extraction of ores and minerals, and provides operational support for many types of equipment used in surface mining. • Operate in Australia, South Africa, UK, China, and the United States. They operate in 98 locations in 17 countries employing around 14,000 people.
The Predecesor Company • Harnischfeger Industries Inc. • Began over 125 years ago • Emerged from chapter 11 in July 12, 2001 as Joy Global Joy Global 2011 10-K
LeTourneau Technologies Inc. • Acquired on June 21, 2011 for $1.0 billion. • Purchased all outstanding capital stock • Financed with cash on hand and $500 million through credit. • Builds and supports equipment for the mining and oil and gas drilling industries. • On August 29,2011 sold 100% of the outstanding shares of the drilling segment for $375 million. Joy Global 2011 3rd Q 10-Q
Purchase of International Mining Machinery • On July 11,2011 Joy Global purchased 534.8 million shares of IMM for HK$8.5 per share • On July 28, 2011 they purchased 136.5 million shares of IMM for $140.6 million. • On August 16, 2011 the purchased 102 million shares for $105.1 million. • Completion of this acquisition is subject to approval by the Anti-monopoly Bureau of The Ministry of commerce of the People’s Republic of China. • If it is approved Joy will have a controlling stake of approximately 59.4% of IMM, and they will be required to make an offer to purchase the remaining shares at a minimum price of HK$8.5 per share Joy Global 2011 3rd Q 10-Q
Macroeconomic Outlook • They have a general concern about slowing macro growth worldwide. • Fundamentals in commodity markets still remain strong • Markets for copper and iron ore continue to be driven by strong demand in China, India, and other emerging markets. Joy Global 2011 3rd Q 10-Q
Industry Overview • They have general concerns over slowing economic growth and industry fundamentals that remain strong. • Because of slowing worldwide macro growth can be reflected in their forecasts for the rest of 2011 and the first half of 2012. Joy Global 2011 3rd Q 10-Q
Company Overview • Commodity and energy fundamentals remain intact despite slowing industrial production and economic growth. • Joy global has NOT experienced any projects being differed, delayed, or de-prioritized. • After market revenue is still seeing strong growth. • Due to a few factors such as; higher mine production levels, low ore grades, tougher geological conditions, and a growing work fleet. Joy Global 2011 3rd Q 10-Q
Company Overview (continued) • Even with strong fundamentals there is a possibility of slowing demand growth. • However they do not expect the macro concerns to lead to major market corrections. • Joy will use this as an opportunity to “trim up our business”. Joy Global 2011 3rd Q 10-Q
Ownership Above 10 holders comprise 39.03% of shareholders’ ownership. Data as of 30th September, Capital IQ
Products and Services • Continuous miners – Electric, self-propelled continuous miners cut material on a horizontal rotating drum. Once cut, the material is gathered onto an internal conveyor and loaded into a haulage vehicle or continuous haulage system for transport to the main mine belt. • Longwall shearers – A longwall shearer moves back and forth on an armored face conveyor parallel to the material face. The shearer cuts 1.2 to 6.5 meters of material on each pass and simultaneously loads the material onto the armored face conveyor for transport to the main mine belt.
Powered roof supports – Roof supports perform a jacking-like function that supports the mine roof during longwall mining. The supports advance with the longwall shearer and armored face conveyors, resulting in controlled roof falls behind the supports. A longwall face may range up to 400 meters in length. • Armored face conveyors – Armored face conveyors are used in longwall mining to transport material cut by the shearer away from the longwall face.
Shuttle cars – Shuttle cars, a type of rubber-tired haulage vehicle, are electric-powered with umbilical cable. They are used to transport material from continuous miners to the main mine belt where self-contained chain conveyors in the shuttle cars unload the material onto the belt. Some models of Joy shuttle cars can carry up to 22 metric tons of coal. • Flexible conveyor trains (FCT) – FCT’s are electric-powered, self-propelled conveyor systems that provide continuous haulage of material from a continuous miner to the main mine belt. The FCT uses a rubber belt similar to a standard fixed conveyor. The FCT’s conveyor belt operates independently from the track chain propulsion system, allowing the FCT to move and convey material simultaneously. Available in lengths of up to 570 feet, the FCT is able to negotiate multiple 90-degree turns in an underground mine infrastructure.
Roof bolters – Roof bolters are roof drills used to bore holes in the mine roof and to insert long metal bolts into the holes to reinforce the mine roof. • Battery haulers – Battery haulers perform a similar function to shuttle cars. Shuttle cars are powered through cables and battery haulers are powered by portable rechargeable batteries.
Continuous haulage systems – The continuous haulage system provides a similar function as the FCT in that it transports material from the continuous miner to the main mine belts on a continuous basis versus the batch process used by shuttle cars and battery haulers, but it does so with different technology. It is made up of a series of connected bridge structures that utilize chain conveyors that transport the coal from one bridge structure to the next bridge structure and ultimately to the main mine belts. • Feeder breakers – Feeder breakers are a form of crusher that use rotating drums with carbide-tipped bits to break down the size of the mined material for loading onto conveyor systems or feeding into processing facilities.
Coal Industry Outlook • Revenue is expected to grow 2.7% annually to $48.0 billion in the five years to 2016. Metallurgical coal will still be a sought after product as emerging economies address infrastructure concerns rapidly by creating steel. Price increases • Coal prices will continue rising as the global economy recovers. Metallurgical coal prices will grow as emerging economies expand rapidly and invest in their infrastructure. The Appalachian Basin has some of the highest grade metallurgical coal in the world and will be sought after by emerging countries. • Competition from abroad is expected to intensify for the attractive coal-growth segments in emerging economies. For example, as production picks up in Australia, Australian producers will be able to better serve China, since the country is expected to be a hot spot for imported coal. This trend will place negative pressure on US coal prices.
Coal Industry Outlook (continued) Greenhouse gas concerns • Environmental concerns will also significantly affect the industry. • Threat to coal from natural gas, on the back of environmental concerns and historically low prices. • In the face of environmental concerns, coal-based generation will still be a large part of the US energy infrastructure and is anticipated to be cost effective enough to meet a major portion of domestic energy demand. • Attractiveness of low-sulfur coal. Low-sulfur coal from the western part of the United States will likely continue gaining market share at the expense of higher sulfur coal from the eastern states as they are usually cheaper and more environmentally friendly. With greater interest in this region, increased investment to expand production will follow. M&A to continue • Further consolidation is expected as firms continue their search for metallurgical coal. As demand rises from emerging economies • This environment will favor larger companies, since small coal producers are less likely to have the financial resources required. Industry consolidation will occur as larger companies buy out smaller firms to strengthen their balance sheets. IBIS World report: Coal Mining in the US
Astec Industries, Inc. • Designs, engineers, and manufactures equipment and components for road building, utility, and construction activities • Their aggregate and mining group segment is similar to Joy Gobal’s surface mining segment • Caterpillar Inc. • Manufactures and sells construction and mining equipment, diesel and gas engines, industrial gas turbines, and diesel-electric locomotives worldwide • The Machinery business operates underground mining equipment, tunnel boring equipment and related parts, which directly competes with Joy’s underground mining business • Kennametal Inc. • Manufactures and supplies tooling, engineered components, and advanced materials consumed in production processes worldwide • The infrastructure segment serves customers in many areas including underground mining and surface and hard rock mining • Terex Corp. • Manufactures and markets machinery products, equipment, and related replacement parts and components for construction, quarrying, mining, shipping, transportation, refining, energy, and utility industries • Terex’s construction segment offers many different machines, equipment and services that compete with Joy Global’s surface mining segment Competitors
Public Comparables Analysis • Terex Corp is trading at much higher premium relative to the other firms • High growth expected • CAT trades on the lower end comparatively • Most likely because it’s a more mature company with less comparative growth opportunities • Joy Global is trading in the middle of its peers for most multiples • P/S premium of 1.7x 2012E versus a mean of 0.7x
Joy has a relative value ranging from $42.42 to 78.99 a share • Revenue multiples account for the lower valuation • Currently, Joy trades at revenue premiums due to expected growth and increased margins • Based on fully dilutive shares Public Comparables Analysis
For the past two years, Joy’s ROE ranks substantially higher • 34% versus the next highest of 24% DuPont Analysis
Liquidity Analysis • Joy has a strong cash and liquidity position Days cash is the number of days between when a firm disburses cash to when it collects cash • Joy Global has the highest days cash with 47
The stock market as a whole, including these firms, has increased since the low of the US downgrade Joy has outperformed its competitors over the last three month period Stock Price Analysis
The DCF value is roughly $70.83 • Public Comparables ranged from $42.42 to $78.99 • Low range due to Joy’s premium P/S • Expect high growth and increased margins • Higher margins equals higher value • PEG ratio is at 0.77 • Less than 1 means inexpensive Recommendation