Is the Mining Industry a Sinking Ship, Or Can It Recover?
Shares of Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY) have soared in recent weeks, but not because of a growing market — rather, that belief in core segments like mining can’t get much worse. This, combined with Joy Global’s recent earnings report, has many bullish. Does this alone make either a good investment?
Back in late May, Deutsche Bank’s (NYSE:DB) Vishal Shah took a bullish and rather gutsy stance on Joy Global and Caterpillar, saying that fundamentals are stabilizing. The firm explained that excess capacity remains in double digits as a percentage despite the destocking of mines being near complete, thus suggesting that more equipment will be needed.
The firm also says that dealer inventories for mining equipment has become normalized, and that fleet utilization for mining equipment rentals is now starting to see a recovery. Finally, Deutsche Bank makes note that bidding activity for operations and maintenance work has shown improvements as well. Combined, these are all signals there is a recovery in the mining industry, a space where Caterpillar and Joy Global remain industry leaders.
Albeit, the mining industry has been tough to predict in recent years, as analysts have often tried to time its bottom only to be brought down to even lower levels. Nonetheless, Joy Global reported earnings on Thursday, and despite a whopping 31.6 percent decline in revenue, the company did beat low expectations and reiterate prior guidance.
Moreover, Joy’s bookings declined just 7.2 percent to $1.05 billion, which is notably a more bullish decline than its overall revenue. This further adds to the notion that the mining industry is either at the beginning stages of a recovery, or has reached a bottom. With the company saying that met coal prices are at their weakest point since 2009, it’s easy for investors to buy on the notion that it couldn’t get much worse.
With that said, Joy Global’s revenue for the full-year is expected to decline 25 percent while Caterpillar’s is expected to grow 1 percent year-over-year. In regards to Joy Global, it creates two-thirds of its business from coal miners, while Caterpillar’s business is a bit more diversified in construction. Nonetheless, Caterpillar has suffered fundamentally in the last year due to its mining business.
Therefore, should investors be bullish based on what we know? Currently, both stocks are touching new 52-week highs, with Joy trading at 15.6 and Caterpillar at 18.4 times earnings. Hence, neither stock is particularly discounted given their fundamental flaws, and looked priced for a recovery with measurable year-over-year growth. Yet, at this point in time it’s just too early to make such a call. Thus, despite the recent reasons to be confident, investors should step back and realize that we’ve been tricked before, and that both stocks could have more downside than up in the immediate future.