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.