Joy Global: A Peter Lynch pick

This stock meets the investing criteria of Peter Lynch, the famed manager of the Fidelity Magellan fund.

By Oct 8, 2013 11:04AM
MoneyShow.comPeter Lynch, vice chairman of Fidelity Research Company on October 27, 2009 © BRIAN SNYDER/Newscom/ReutersBy John Reese, Validea

For our model portfolio, we select stocks based on the strategies of legendary investors; our latest pick scores highly on the price-to-earnings to growth strategy developed by Peter Lynch.

Joy Global (JOY) is a manufacturer and servicer of high productivity mining equipment for the extraction of coal and other minerals and ores. Its equipment is used in mining regions throughout the world to mine coal, copper, iron ore, oil sands, and other minerals.

According to our Peter Lynch-based model, this methodology would consider JOY a "fast-grower". In addition, the investor should examine the P/E (7.97) relative to the growth rate (20.35 percent), based on the average of the 3, 4 and 5 year historical earnings per share growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for JOY (0.39) is very favorable.

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remains below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold.

JOY, whose sales are $5.4 billion, needs to have a P/E below 40 to pass this criterion. JOY's P/E of (7.97) is considered acceptable.

This methodology would consider the Debt/Equity ratio for JOY (44.27 percent) to be normal (equity is approximately twice debt).

When inventories increase faster than sales, it is a red flag. However an increase of up to 5 percent is considered bearable if all other ratios appear attractive.

Inventory to sales for JOY was 30.29 percent last year, while for this year it is 25 percent. Since inventory to sales has decreased from last year by -5.29 percent, JOY passes this test.

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20 to 50 percent, as earnings growth over 50 percent may be unsustainable.

The EPS growth rate for JOY is 20.3 percent, based on the average of the 3, 4 and 5 year historical earnings per share growth rates, which is considered very good.

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