cheap coal still big business around the world

–(– 01/05/2010 – International industry news provided by Financial News USA.

Joy Global (JOYG) sells mining equipment to the world, especially for coal mining.

It’s a good thing Joy spreads Joy (products) to the world, because the coal business in the U.S. isn’t as upbeat. It’s bogged down with big stockpiles, not to mention an image problem over environmental concerns.

The U.S. economy hasn’t yet picked up a whole lot of steam either, especially compared with faster-growing economies in emerging markets such as China and India. In those nations, low-cost coal is the fuel of choice to power new electric plants.

Meanwhile in the U.S., relatively low prices for natural gas have been giving the cleaner fuel a leg up on coal, which is increasingly getting a bad reputation because it emits lots of carbon dioxide, a greenhouse gas.

Pending legislation aimed at reducing greenhouse gases doesn’t ease utility firms’ jitters over building new coal facilities, analysts say.

International Footprint

“The majority of (Joy’s) business is international and outside the U.S. (where) coal end-markets are strengthening,” said analyst Andy Kaplowitz of Barclays Capital. “And I expect them to continue to slowly strengthen.”

Along with crosstown rival Bucyrus International (BUCY), Milwaukee-based Joy is a worldwide leader in mining equipment and machinery, both surface and underground. Its gear is used in the mining of coal, copper, iron ore and other minerals.

The worldwide economic slowdown has hampered overall sales of mining equipment, even in emerging markets. Orders have slowed from a year earlier, meaning lower revenue several months down the road when it’s time to deliver the equipment.

Revenue in Joy’s fourth quarter ended Oct. 30 fell 6.6% from a year earlier to $963.5 million. But Joy trimmed costs to compensate and, with a one-time gain, posted an 8% rise in per-share earnings to $1.20.

The full year ended with a 21% rise to $4.41 a share on revenue of $3.6 billion, up from $3.42 billion the year before.

Analysts expect orders to improve in fiscal 2010 as demand ticks up modestly, meaning good news for 2011. That view even includes the U.S., which accounts for 42% of Joy’s business.

Meanwhile, 2010 revenue is still seen down from 2009.

Joy views 2009 as “the cyclical floor for incoming orders,” CEO Michael Sutherlin said in a fourth-quarter statement.

“Our customers are increasing their capital expenditure budgets for 2010,” he said, noting that they were “reactivating” some of the projects they had put on hold.

For most of 2009, U.S. coal consumption was down 10% from 2008, according to the Energy Information Administration. But Barclays’ Kaplowitz expects electricity demand and higher natural gas prices to boost coal-fired power generation growth in 2010.

oy’s profit for fiscal 2010 (ending in October) is expected to drop in the double digits as deliveries match the slowdown in orders from 2009. Analysts polled by Thomson Reuters estimate 2010 earnings falling 33% to $2.95 a share.

“If a customer orders a product today, most of the time you won’t see that go through Joy’s income statement for nine to 12 months,” Kaplowitz said. “Their orders started to get weaker starting in November of 2008.”

So why has the stock been going up? Shares have jumped from a low of 14 in late November 2008 to 55 at Monday’s close.

Investors are apparently looking ahead. Even as profit is seen dropping in the near term, they understand that orders are expected to slowly rise over the year, giving a lift to 2011 sales and profit. Indeed, analysts expect 2011 earnings to rise 20%.

“The stock rallied off the bottom because of an expected global rebound and also because orders have stabilized,” Kaplowitz said. “Over the next year, orders could slowly rise and that could help the stock price over time.”

Joy’s outlook has been improving since late summer, says Paul Bodnar, an analyst at Longbow Research.

“Estimates are going up because capital expansion plans keep increasing by miners such as BHP Billiton (BHP), Rio Tinto (RTP) and Vale (VALE),” Bodnar said. “Equipment orders are highly correlated to those orders by mining companies.”

Those mining firms, Joy’s customers, operate in international markets.

In a Dec. 16 conference call, Joy CEO Sutherlin said the impact of emerging markets had been “very dramatic, both in moderating the trough and in being the early driver of recovery in commodity demand.”

He said the company was expecting 2010 to be “a year of improving order rates.” At the top of his list: China and Australia.

Competitive Threat?

Meanwhile, Joy’s chief rival, Bucyrus, recently announced that it would get bigger. It plans to acquire Terex Corp.’s (TEX) mining business for $1.3 billion. Since the division takes in about $1 billion in annual sales, the combined company would slightly overtake Joy in annual revenue.

But analysts don’t see the merger as too much of a competitive threat to Joy, since Terex’s mining unit doesn’t compete much in Joy’s arena. It’s more involved in heavy mining trucks and equipment: electric haul trucks, hydraulic mining shovels and diesel drills.

Joy sells electric mining shovels, rotary blasthole drills and walking draglines, among other gear.

In terms of market share, the merger is “not a game-changer,” Bodnar said.

“Consolidation,” Kaplowitz added, “should also help the industry to some extent because it may help a little bit with pricing.”

Bucyrus, however, could be seen as more of a “one-stop shop,” Kaplowitz said, possibly making it more attractive to potential customers. About Financial News USA

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