The Industrials sector led the markets lower yesterday after Joy Global Inc. (JOY) reported its fourth quarter results. The stock price of the Milwaukee-based heavy machinery manufacturer was down almost 6% at the day’s close after it missed earnings by 8.9%, and provided guidance for the next year which is lower than analysts’ estimates.
Joy missed analysts’ earnings estimates of $1.12 by $0.01 while revenues were in line with estimates of $1.18 billion for the company’s fiscal year 2013, which runs till October 26, 2013. The manufacturer of surface and underground mining machinery reported a net 26% year-over-year (YoY) decline in revenues for 4QFY13, led by lower sales in the surface mining segment.
The surface mining segment’s quarterly revenues were down 36% YoY to $536 million while the company’s underground mining segment was down 16% to $696.3 million over the same period. Combined orders were down 16.5% YoY from $1.3 billion to $1.1 billion. The company’s backlog-to-build ratio – which is a way of assessing demand – also declined from 0.45 to 0.30.
The company declared a dividend of $0.1725 per share, in line with the previous disbursement, and has a forward dividend yield of 1.25%.
Machinery manufacturers have been under pressure this year, although the sector had a record year in terms of sales in 2012. Sales to dealers and distributors in 2012 did not result in end-user demand, causing inventory levels to increase. Manufacturers are now under pressure as dealers try to deleverage their inventory build-up.
Declining commodity prices have led to capex reductions of 10% by most miners. Industry surveys suggest the trend will continue in 2014, and lead to overall capex reductions of 15-20%. Coal, the most widely mined commodity and coal miners form the largest share of Joy’s customers.
Nymex coal prices are down 8.3% year-to-date (YTD) due to an excess supply of coal built up in 2012, combined with available capacity for miners to ramp up production and overall lower sales in the US. The natural gas boom in the US has led to falling demand for coal and declining prices in the domestic market and coal prices are expected to stay under pressure as utilities increasingly rely on cheaper, cleaner and more abundant natural gas.
China, the world’s largest producer and consumer of coal, has spare capacity and an oversupply of the commodity, driven by Australian coal.
Industrials as a whole have fared well – the iShares US Industrials ETF (IYJ) and the Industrial Select Sector SPDR ETF (XLI) are up about 30% YTD, around five percentage points more than the S&P 500. Still, heavy machinery manufacturers have missed the bull run. Caterpillar Inc. (CAT), the industry bellwether, is down almost 5% YTD due to its 30% exposure to the mining industry through its Resources segment. Deere Inc. (DE) stock has still posted positive returns, as the majority of its portfolio offerings fall in the Agriculture and Forestry segments.
On the other hand, shares of Komatsu Ltd. (KMTUY), a Tokyo-based heavy machinery manufacturer, are down over 20% for the year and Joy is down 17%, due to its heavy reliance on the mining industry.
CAT dealer stats, an indication of overall inventory numbers at the dealer level, still show a worrying trend. According to the latest numbers released in October, dealer stats were down 12% globally on a three-month rolling basis. The declines have been led by demand reduction from the Asia-Pacific region.
Joy’s management also provided guidance for FY14. Earnings estimates of $3-3.50 are below analyst estimates of $3.68, and the revenue guidance is $3.6-3.8 billion while the street expects $3.8 billion.
If the numbers fail to improve in 2014, it could be another tough year for the industry. Joy has already laid off 450 employees on two separate occasions this year and once again laid off employees last Tuesday. The company did not disclose the number of employees affected though.
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