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2006-12-21 :: Joy Global Gets Some Respect!

Summary: Joy Global Reports a Stellar Quarter
12/18/2006 1:06 PM EST

Here is the key takeaway from the Joy Global (JOYG) call: The coal market in the U.S. is soft, but that is overshadowed by strength in other markets and other geographies. Future guidance for the year ahead reflects continued softness in the domestic coal market. Either you take the bear case and say that all other markets will go the way of U.S. coal or you take the bullish side of the argument and believe that U.S. coal is a standalone issue that is easily absorbed by the diversity of product and geographic mix that JOYG enjoys. Either way, it appears that JOYG was priced for the worst and the stock is set to rebound.

Earnings Results
JOYG reported stellar results as the company earned 71 cents on a GAAP basis and 79 cents, excluding the impact on “discreet” tax items, on revenue of $689 million. These results were far in excess of expectations and sent the stock soaring by over 10% in early activity.

Bookings and Sales
Bookings and sales for the quarter and full year reflected solid double-digit growth year over year, and $836 million of new orders in the fourth quarter increased almost 30% year over year.

U.S. Softness Offset by Growth in Other Markets
The temporary softness in the U.S. underground coal market was more than offset by new order growth in other markets such as copper, iron ore, the oil sands and surface coal markets outside of the U.S. Growth in new orders increased 20% in the quarter and for fiscal 2006. China is still a tremendous growth opportunity. After-market revenue increased by more than 10% in the quarter. The stream of after-market revenue now accounts for 60% of total revenue and is approaching $1.5 billion on an annualized basis.

Gross profit margins increased from 29% to 31% year over year. Gross profit margins are beginning to flatten due to product mix and cost pressures. Order flow continues to reflect the lumps inherent in the business, with the most recent quarter reflecting the positive aspect of this lumpy nature.

Tax Rate
Excluding the impact of the discreet tax adjustments, the effective tax rate was 27% in fourth quarter 2006 and just under 32% in fiscal 2006. Expect the book tax rate to be in the range of 33% to 34% in 2007.

Accounts Receivable and Inventory Figures
Days sales outstanding fell by six days in the quarter, and inventory turns increased 0.3 turns.

Through last Friday, JOYG has repurchased $500 million of stock under the $1 billion stock repurchase authorization.

Fiscal 2007 Guidance
Overall guidance is conservative, reflecting weakness in the U.S. coal market — with revenue in the range of $2.7 billion to $3.0 billion; operating profits in the range of $500 million to $510 million; slight strengthening in gross profit margins; EPS in the range of $2.85 to $3.25, including a 10-cent benefit from further stock repurchases. Note: Current consensus calls for EPS of $2.95 on revenue of $2.84 billion.

Smooth Transitions in Personnel
Mike Sutherlin’s transition into the role of President and CEO is progressing well, and Mike’s replacement at the Joy Mining subsidiary is well-established in his role.

Joy Global Will Remain Competitive
The acquisition of DBT, a Germany-based business, by competitor Bucyrus (BUCY) will not erode JOYG’s competitive position.