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Joy Global, Inc. (NASDAQ: JOYG) manufactures mining equipment used to extract coal, copper, and iron ore. commodity prices directly impact the demand for Joy Global's products and services. When prices are high, mining companies turn to Joy Global for equipment and expand their operations. Over the past five years, Joy Global generated 106% annual revenue growth on average as commodities prices soared[1].
In addition to sales of original mining equipment, which account for nearly 40% of overall revenue over the past three years[2], Joy Global makes money on long-term service contracts for the equipment it sells. It is a multinational firm - 52% of the firm's 2007 sales were international - but its portfolio is dominated by the coal industry, which accounted for 70% of revenues in 2007.[3] Nonetheless the rise in natural gas and crude oil have helped JOYG, as it has led to increased demand for coal as a substitute source of energy.
JOYG's growth took a major leap forward in 2001, when the company started offering service contracts to companies to which it had sold new equipment[4] - turning one-time purchases into a recurring revenue stream. It also expanded its international operations, as strong growth in emerging markets like China created an insatiable appetitie for energy. This has helped companies such as Deere & Company (DE), Terex (TEX), and Joy Global increase sales. In 2007, Joy Global opened manufacturing sites in China and Poland to benefit from the growing coal demand in Eastern European Countries, Russia, and China[5].
[edit] Business Overview
[edit] P&H Mining Equipment
The P&H Mining Equipment division manufacturers and services the surface mining equipment. Accounting for 44% of Joy Global's sales, or $1.125 billion[6], this subsidiary sells products and services to copper miners (40% of P&H revenue), coal (30%), iron (15%), and other mineral resource miners (15%)[7]. Using over 30 strategically located support centers, Joy Global focuses on selling and servicing three distinct types of surface mining equipment.
- Electric Mining Shovels: Miners use this product to load large amounts of minerals into trucks or conveyors. The electric mining shovel competes with hydraulic excavators, which are more maneuverable but more expensive to operate.
- Walking Dragline: Miners need walking draglines to remove layers of unwanted overburden in order to gain access to the desired mineral source.
- Blasthole Drills: Frequently, miners need to use explosives to blast rock. The blasthole drills are used to make holes for the explosives to be placed within the spaces.
Long-term commitments to customers form a $833 million backlog for the P&H Mining segment of Joy Global[8]. Management cites continued strength in Canadian oil sands, global copper markets, and emerging markets as evidence for the already planned purchase agreements from customers[9].
[edit] Joy Mining Machinery
Joy Mining Machinery manufactures and services underground mining equipment used primarily for extracting coal, which accounts for nearly 90% of this business segment's sales[10]. With over 4,500 employees working out of 40 field offices, Joy Mining Machinery generated $1.42 billion during 2007[11]. This subsidiary uses manufacturing sites in South Africa, the United States, and the United Kingdom to produce four main types of underground mining equipment.
- Continuous Miners: This electric and self-propelled mining equipment cuts through material, which is subsequently moved for processing.
- Haulage Products: Miners use this equipment to transport the material to the main mine belt.
- Bolting System: The bolting system drills holes into which miners place long metal bolts in order to reinforce the mine roof.
- Longwall Systems: This collection of equipment includes three main equipment used to shear material. The longwall shearers run parallel to the material and cut up a meter thick layer of rock. The armored face conveyors collect simultaneously the material cut by the longwall shearers. Miners use roof supports to prevent a roof collapse during the shearing process.
This division backlog equaled $804 million at the end of 2007 due to strong global demand for new equipment and service of existing equipment. Joy Global expects to fulfill most of these orders in 2008[12].
[edit] Overall Financials
Although Joy Global's business faces cyclical demand for new equipment, the past six years of growing demand for commodities supported $947.5 million in sales in 2007 compared to $316.4 million in 2001. Furthermore, the large installment of Joy Global products helped increase demand for aftermarket service. Servicing of used equipment, which faces less cyclical demand than new equipment, amounted for $1.6 billion in 2007, a doubling since 2001[13].
The above chart[14] shows the contribution to revenue and operating income that surface and underground mining segments generated. A quick glance shows that surface mining faired better than Joy Global's underground mining segment. Underground mining suffered from weak Central Appalachia region of the United States as the coal production flattened and increased competition in China also hurt sales. The surface mining segment performed better due to strong demand for copper, which propelled equipment sales and servicing in the Southwest United States. In addition, surface mining of Canadian oil sands and growing demand for commodities in Russia and China benefited this segment. Margins over the past three years improved due to a more favorable product mix that favored aftermarket services, such as equipment assembly and repair[15].
[edit] Geographical Mix
The pie chart below[16] shows that Joy Global makes over 50% of its sales abroad. Joy Global, using estimates in-line with the IMF[17], expects global growth to remain strong at 4-5% asIndia and China lead the way with expectations between 8-10%[18]. To benefit from the economic growth that increases commodity demand, Joy Global continues to expand manufacturing capacity in low-cost locations. Joy Global added underground mining capacity in China through its Tianjin location and recently broke ground on a surface mining manufacturing site in the same spot. Furthermore, the P&H Mining division expanded its shovel capacity by 40% in 2007 to benefit from growing demand for this equipment in the Canadian oil sands. Joy Global also completed a manufacturing site in Poland during 2007 in order to capture growing demand for coal in Eastern Europe and Russia[19].
[edit] Acquisition of Continental Global
In the middle of February 2008, Joy Global purchased Continental Global from parent company, NES Investment Company. Joy Global did not discuss the impact to profits the manufacturing of conveyor systems would produce, but did purchase Continental Global for a price-to-sales ratio of less than one. Joy Global paid NES Investment $270 million for Continental, which generated $340 million in sales in 2007 (Joy Global had $2.5 billion in sales). Continental Global operated manufacturing sites in the United States, the United Kingdom, South Africa, and Australia[20]. The addition of Continental's conveyor systems expands Joy Global's range of products and services. Management expects to capitilize on the investment by selling the conveyor systems through its large customer base. Further, the conveyor systems allow for more efficient mining and decreased pollution, which should boost demand from a growing number of customers seeking more environmentally friendly solutions[21].
[edit] Key Trends & Risks
- Commodities Prices impact the demand for mining equipment. When commodities prices increase (usually during periods of strong economic growth when economic and domestic infrastructures are expanding and demanding more raw materials), mining companies expand operations due to the higher profit margins. Over the past six years, commodities performed well; Copper prices more than quadrupled[22]and oil traded at $18 per barrel in 2002 but reached $100 in 2008[23]. The strong performance extends beyond these two into other commodities. With the upswing in price, capital expenditures by mining companies grew rapidly between 2000 and 2006 as shown in the graph[24]. Joy Global faces specific commodity price risk (and reward) in coal, copper, and iron ore, because the equipment manufacturer sells mainly to mining companies extracting these three commodities.
- Coal is key to JOYG's revenues: Joy Global generates roughly 70% of its annual revenue from coal mining customers[26]. Production of coal shifts with economic and political factors. As oil prices rise, alternative energy forms become more attractive. Coal power substitutes natural gas and oil consumption in some instances, and therefore, the coal price tends to move higher also. Political actions can adversely effect the demand for coal. Politicians can impose taxes to curb its use or provide subsidies to other alternative energy that is cleaner. In 2007, demand for North American coal fell, which resulted in Joy Machinery (the underground mining equipment of Joy Global) reporting revenue lower than in 2006[27]. Joy Global expects the United States coal market to recover, but also, is diversifying its coal revenue outside the volatile United States[28].
- Copper also affect JOYG's balance sheet:Miners of copper form the second largest customer of Joy Global[29]. Prices of copper increased rapidly from 80 cents per pound in 2003 to almost $4.00 in 2008[30] People use copper in electronics, cookware, fixtures, plumbing, and a variety of other items. The strong rise in copper prices boosted extraction of the material by miners. P&H Machinery benefited from this increased production in the Southwest United States[31]. [32]
- International markets are the key to Joy Global's revenue growth. Joy Global's international operations already account for more than 50% of the company's revenues[33]. High infrastructure growth contributes to commodity demand in Russia, China, and other Emerging Markets. With the increasing demand, supply comes on board. Joy Global plans to capture growth in these expanding economies by using a strategic network of service centers and manufacturing sites to complete sales to mining companies in these areas.
- Joy Global has expanded its aftermarket services division. After emerging from bankruptcy in 2001, the company restructured to promote maintenance, repair, assembly, and diagnostic testing for mining equipment[34]. This move increased margins and decreased the cyclical nature of demand for new equipment, because mining companies need equipment serviced even during flat production growth. Joy Global can therefore benefit from growing demand in two ways - equipment sales, and new service contracts for this equipment. Mining equipment breaks down over time, and repair parts and maintenance are necessary. Aftermarket sales accounted for 63%, or roughly $1.6 billion, of total revenue in 2007[35].
[edit] Competition
Joy Global competes with its peers on the basis of price, quality, delivery, and service. Most of Joy Global's customers are large mining companies that can exert significant purchasing power. As such, these customers can demand productivity and service clauses more easily than a smaller miner could when purchasing equipment. A local equipment service center mutually appeals to Joy Global and their customers - repairs can be made quickly and expenses are lower due to the close proximity. As a result, customers prefer to buy from equipment manufacturers with service centers not too distance from their mining operations.
Joy Global offers a wide range of mining products. Some of its equipment has few competitors offering direct substitutes. For instance, Bucyrus International (BUCY) offers the only electric mining shovels and draglines that compete with Joy Global's; however, such products compete with alternatives like hydraulic excavators[37].
In addition to competing with large global manufacturers such as Caterpillar (CAT), Bucyrus International (BUCY), and Terex (TEX), Joy Global faces pressure from emerging local companies. The competitive pressure from small companies tends to be more for repair service than new equipment[38].
[edit] Market Share and International Sales
This table[39] compares sales and markets for large companies in the Farm and Construction Machinery Industry. For those companies operating in the mining industry, an extra column indicates each firm's global market share in the $17.7 billion market for mining equipment[40].
| Company | Foreign Sales as % of Total | 2007 Sales | 2006 Sales | 2006-2007 Sales Growth | Main Industries | Global Mining Market Share |
| Joy Global (JOYG) | 53% | $2.5B | $2.4B | 4.17% | Mining | 14.12% |
| Bucyrus International (BUCY) | 53% | $1.6B | 738M | 119.00% | Mining | 9.04% |
| Caterpillar (CAT) | 58% | $45B | $41.5B | 8.40% | Mining, Agriculture, Construction, Commercial | ^45.19% |
| Deere & Company (DE) | 35% | $21.5B | 22.1B | -2.71% | Agriculture, Construction, Commercial | |
| CNH Global N.V. (CNH) | 58% | $15B | $13B | 15.38% | Agriculture, Construction | |
| Kennametal (KMT) | 52% | $2.4B | $2.3B | 4.34% | Mining, Industrials | ^4.56% |
| Manitowoc Company (MTW) | 48% | $4B | 2.9B | 37.90% | Construction | |
| Terex (TEX) | 70% | $9.1B | 7.6B | 19.73% | Mining, Construction | 11.82% |
| AGCO (AG) | 78% | $6.8B | $5.4B | 25.93% | Agriculture | |
^Estimates generated by the business segment of specified company include heavy equipment that can be used in highway construction in addition to mining. As a result, the actual market share percentage is likely lower.
[edit] References
- ↑ Yahoo Finance (JOYG)
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "General" Page 4
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Risk Factors" Page 14
- ↑ Joy Global's Website
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Fiscal 2007 Developments" Page 5
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24
- ↑ Joy Global's Website
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Backlog" Page 9
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Backlog" Page 9
- ↑ Joy Global's Website
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Backlog" Page 9
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Overview" Page 22
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24-26
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24-26
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Geographical Distribution" Page F-41
- ↑ International Monetary Fund
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Overview" Page 22
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Overview" Page 22
- ↑ Yahoo Finance Article
- ↑ Powder and Bulk Article
- ↑ Kitco Metals
- ↑ Wikinvest Concept: Oil Prices
- ↑ US Government Census Data
- ↑ National Mining Association
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Risk Factors" Page 14
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24-26
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Overview" Page 22-23
- ↑ Joy Global's Website
- ↑ Kitco Metals
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Results of Operations" Page 24-26
- ↑ Kitco Metals
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Geographical Distribution" Page F-41
- ↑ Joy Global's Website
- ↑ Joy Global (JOYG) Form 10-K, Fiscal Year 2007, "Business" Page F-4
- ↑ Joy Global's Website
- ↑ Bucyrus International Form 10-K, Fiscal Year 2007, "Competition" Page 12
- ↑ Joy Global Form 10-K Fiscal Year 2007, "Competitive Conditions", Page 9
- ↑ Collection of Form 10-K, Fiscal Year 2007, for each company in the table
- ↑ Freedonia Group
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