Joy Global Backs Away From Its Buyback

By Dr. Duru written for One-Twenty

March 4, 2009


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On September 15, 2008 I wrote an ill-fated piece expressing increased confidence in nibbling at commodity-related stocks because of announced buybacks from the likes of Joy Global (JOYG), Potash (POT), and Foster-Wheeler (FWLT). I tried to be as cautious as possible in my assessments given the major tumult at that time and given the immense relative size of the announced buybacks for JOYG and POT. The major miss for me at that time was a lingering confidence that it was a good time to start betting on future inflation (reflation). Moreover, it turned out that many (most?) company executives were not giving the unfolding malaise enough consideration and vastly missed the mark in their guidance and measures on their businesses.

This is what I had to say after JOYG made its buyback announcement on September 10: "JOYG doubled its buyback from $1B to $2B. This is incredible for a company whose market cap is under $6B. With cash holdings of $307M and debt of $565M, we have to assume that this buyback is going to occur over a very long period of time. Still, JOYG's chart shows that a credible bottom could be in place. Note well that overhead resistance is heavy with the 50 and 200DMA converging near the post-earnings gap down." At least I pointed out where to place stops underneath any longs...

Fast-forward to today's earnings announcement from JOYG. JOYG is now 70% smaller as a $1.8B company with cash holdings of $164M and debt of $638M. It should be no surprise then that during JOYG's conference call executives lamented that JOYG "...does not have an adequate amount of cash reserves built up" when asked about the status of its buyback program (quote from briefing.com). This discussion reinforced the status update on cash holdings already printed in the earnings report: "The Company believes it is prudent to build cash reserves as a hedge against the uncertainty in its markets, and has set a priority for cash accumulation ahead of other discretionary uses of cash until either adequate cash reserves are established or until there is greater clarity in the outlook for its markets." I am sure you see some irony here. At much higher prices, JOYG was ready to buy up shares. Now, with shares much lower, technically, they should be considered "cheap." If buying some shares is not got a good use of capital, we could infer that the company fears its stock price will go much lower from here...

JOYG's stock was still rewarded by a 10% post-earnings pop. Given a 30% year-to-date decline, this pop provides little solace given the dire market outlook embedded within the reaffirmed earnings and revenue guidance from JOYG's report (revenues between $3.5-3.7 billion and earnings per share of $3.60-$4.00):
  1. New original equipment orders received and booked this quarter, before cancellations and foreign exchange rate impact, were down significantly due to demand and were also impacted by the timing of some potential orders in process.
  2. After the current projects are completed in 2009, the Company expects its capital expenditure levels to be reduced significantly in response to the uncertainty it sees in its markets.
  3. Global economic conditions continue to deteriorate...forecasts expect each of the major Organization for Economic Cooperation and Development ("OECD") countries to experience contraction and the collective emerging markets to experience significantly reduced rates of economic growth in 2009.
  4. Most of the Company's customers have significantly reduced the mine expansion plans and capital expenditures that they had set under the higher pricing levels of early 2008. Those reductions vary by customer and commodity, and go up to the 50 percent range.
  5. Announced production cuts for copper have reached four to six percent of global capacity.
  6. The Company expects global steel production in 2009 to be five to ten percent below that of 2008. The Company expects metallurgical coal and iron ore production changes to mirror that of steel. Consistent with that expectation, announced production cuts for both iron ore and metallurgical coal have been 15 to 20 percent of their global capacity.
  7. Just as the Company expects the conditions of uncertainty and volatility to persist through 2009, it also expects the booking rates for its original equipment during this period to remain substantially below the comparable booking levels of 2008.
On the positive side, JOYG points to some signs of demand stabilization, but overall the company confirmed my current expectation that any economic recovery will be a 2010 story at best. (It is also another reminder of why the market's November lows were going to fail.)

Be careful out there!

Full disclosure: No positions. For other disclaimers click here.

DR. DURU®, 2009