Streetwise for July 22

Streetwise for Sunday, July 22, 2012

 

 

Streetwise

 

Lauren Rudd

 

Sunday, July 22, 2012

 

Consider Joy to Ward Off Economic Blues

 

 

 

Few will disagree that the performance of the equity markets, despite some recent gains, has been erratic, unpredictable and at times just plain not fun. Even worse, there is no shortage of prognosticators willing to tell anyone who will listen (the media generally tune them in with rapt attention) just how much worse the future is likely to be. If all that negativism has you wondering if Wall Street is the street you should be on, maybe the following will help shine a bit of realistic light into that dark abyss we call the future.

 

Although the battle cries of disastrous deficits, failed stimulus programs and rising inflation ring hollow when bathed in the light of reality, hysterical voices of doom continue to flood the media. The message, repeated ad nauseauum, is that we cannot afford the unemployed, the poor, healthcare, Medicare and Social Security. Drastically reducing deficits and debt must take precedence. Failure to act will topple the economy, or so the bastions of conservatism tell us.

 

Instead of solving the problem, many in Congress are willing to accept high unemployment as being a structural and permanent part of the economic landscape — thereby condemning the unfortunate to the horrors of poverty. The tragic part is that relatively simple solutions are readily at hand.

 

As many economists, including Yale economist Robert Shiller and Princeton economist Paul Krugman have said repeatedly, one avenue of relief is that the government could hire workers directly for public services, just as it did during the Great Depression. In doing so we would see increased economic activity, rising corporate profits and subsequently higher corporate share prices.

 

So where does all this leave you? The answer is an easy one? Search for investment candidates most likely to benefit from the inexorably slow but continuous economic growth. Consider for example Joy Global (JOY). I am discussing Joy because the company, in addition to being one that I have received numerous questions about recently, illustrates two key investment points.

 

Joy engages in the manufacture and servicing of mining equipment for mineral extraction worldwide. A year ago my earnings estimate for the fiscal year ending in October was $6.00 per share, with a 12-month target price on the shares of $113. The company earned $5.92 and the shares recently closed at $55.55.

 

This clearly illustrates a point I have made repeatedly. You need to watch your investments. When the shares were selling at $92 as recently as late February, a sell stop order at around 85, while still giving back about $10 per share, would have staved off a round trip loss of an additional $35. So how do you know when and at what price to add a stop loss? You don’t; you estimate what you are willing to return, in this case about 10 percent of the $95 share price last July. After that you want to watch from the sidelines as you wait for the share price to plateau albeit at a lower level.

 

The second key point is whether you should repurchase the shares if you sold, or purchase the shares either as a new investor or on a dollar-cost averaging basis. The answer is easy to write but difficult to implement. You need to do a full analysis on the company and determine if you still like the shares today.

 

In the case of Joy, second quarter bookings were $1.2 billion, compared to $1.5 billion a year ago, a decrease of 19 percent. However, net sales increased 45 percent to $1.5 billion when compared to the same period last year.

 

Operating income was $333 million in the second quarter of 2012, compared to $234 million a year ago and was 22 percent of sales in both years. Income from continuing operations was $218 million or $2.04 per share for the second quarter compared to $162 million, or $1.52 per share a year ago.

 

Looking at the intrinsic value of the shares, the discounted earnings model produces a result of $176, while the more conservative free cash flow to the firm model produces an intrinsic value of $144. My earnings estimate for this fiscal year is $7.25 per share and $7.75 per share for fiscal 2013 with a 12-month target price on the shares of $62 for a 22 percent gain. In addition there is a dividend yield of 1,40 percent.