Chasing Value: Buy Joy Global while it's cheap

The mining equipment company may be the ultimate pick-and-shovel play in the industry.

By SDL10001 Dec 17, 2012 11:17AM

Digital Vision SuperStockAn approaching new year is invariably a time for lists -- about the past, about the future. And stock-picking lists for 2013 are no different. While I've posted similar lists in the past, this year I decided to raise the stakes and think about which companies I would buy -- that is, if I were to actually buy the whole company. Joy Global (JOY) is be high on my list. We cannot afford to make a play on the company, but we did buy some of its stock for our clients and acquired a significant options position in the Chasing Value Fund.

Last Friday, JOY closed at $61.64 despite Bloomberg reporting the company sees no immediate recovery in mining equipment demand. But the stock remains far below its 52-week high of $96. If there ever were a time to look at mining companies it would be when there is doubt in the market and weak projections from all corners of the investment world. In particular, Joy would be worth a look with its current price-to-earnings (P/E) ratio of 8.58, price-to-sales (P/S) of 1.15 and the standout return-on-equity (ROE) of 33.88%.

Two years ago, Caterpillar (CAT) was thinking along the same lines when it bought Bucyrus International for $8.8 billion. Joy Global is valued at only $6.53 billion. Who might benefit the most from acquiring Joy? Two candidates come to mind. The first is BHP Billiton (BHP), the largest mining company in the world, headquartered in Australia. It would be easy for BHP with a capitalization $203 billion to make the move.

It would also be very beneficial for the mining giant, given that it is one of the largest consumers, if not the largest, of Joy equipment. Furthermore, the acquisition would add to its bottom line -- BHP has posted negative year-over-year growth compared to more than a 20% growth for Joy. BHP also has a much higher P/E, P/S and price-to-book ratio then Joy. Finally, BHP's current ROE of 24%, while great, is notably less than that of Joy.

The second potential buyer of Joy that comes to mind would be the Chinese government. The country's growing mining industry and thirst for natural resources could put Joy's equipment to good use, while at the same time allow China to use some of its trillion dollar U.S. Treasury stock pile.

Joy global is not only cheap and has strong metrics, but think of the barriers to entry for new competition. Before you could produce your first gigantic dump truck or earthmover, you would probably have to move heaven, along with the earth. It is irrelevant what Joy Global's business may be in the next few quarters. If you want to buy a bargain you will buy it when it is down, because it will not be down for long, and if others see it as I do, it may not even be an independent company for long.

Sheldon D. Liber is the CEO/CIO of Chasing Value Asset Management, Inc., and General Partner of the Chasing Value Fund. You can follow him on Twitter @chasingvalue



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