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All Smiles in Joy Global?


Solid company, but be wary of earnings.

"Doctor Leo Hayes was our company doctor
From the big coal companies he got his pay
For thirty-nine years he tried to cure us
And now today on his deathbed lay"

-The Dying Doctor (aka The Company Town) by Woody Guthrie

A tad on the dark side, I know. Politics aside, coal has become a very real story over the last few months. We need only to look at a chart of Arch Coal (ACI) or Peabody Energy (BTU) since last spring to get a proper handle on the explosive growth the industry has been experiencing.

Not coincidentally, there has been a rising tide effect in the coal industry. Yesterday we discussed an industry that has directly benefited from the coal story, the railroads. Today let's take a look at the manufacturers of mining equipment, specifically Joy Global (JOYG).

According to its website, "Joy Global Inc. is a worldwide mining machinery and services company. Through its market leading divisions -- P&H Mining Equipment and Joy Mining Machinery -- the Company manufactures underground and surface mining equipment and offers aftermarket-related services". Home Depot (HD) vs. Lowe's (LOW)?, Intel (INTC) vs Advanced Micro Devices (AMD)? Well, along with Bucyrus International (BUCY), Joy Global enjoys one of the most unheralded duopolies in any industry. Perhaps of even greater importance, a duopoly that seems to have no end in sight as barriers to entry in this industry make it cost prohibitive for any firm to mount a meaningful challenge.

Lately, investors have caught on as well. Joy Global has rallied some 27% since trading around $52.50 on January 23rd. After reporting 4th quarter earnings on December 19th, Chief Executive Officer Mike Sutherlin commented that "our order rate was a new record, and reflects the strong preference that our customers have for our equipment and services." He went on to say that "strong aftermarket demand and new capacity should boost revenue by 10 to 18 percent in fiscal 2008." At 26.50 times trailing and 16.50 times forward earnings, JOYG still seems to be reasonably priced on a valuation basis, although its price to book of almost 10 is significantly larger than Bucyrus International's price to book of close to 5.

What stuck with me back on December 19th was something mentioned later in the release. Joy Global said it would start offering only annual forecasts, which it may update, and stop giving a rolling four-quarter outlook at the end of each quarter. Now when things are going well (which they have been) that methodology is fine and even applauded. The other side of that coin comes if earnings are missed and the Street is left scratching its head.

Joy Global is due to report its first quarter this Thursday, March 6th, before the open. The Street is looking for $0.63 EPS on $605.34 million in revenues. Yesterday afternoon, in a move that may mean nothing, the company announced the resignation of CFO James Woodward. Once again, this may have no significance whatsoever, but I feel it important to point out that Mr. Woodward's resignation comes less than a year of being named CFO and Treasurer on April 18th, 2007.

Joy Global has enjoyed a great run in the price of its stock on what can be only described as a less than inspiring overall market since the start of this year. There is no question that the company has been firing on all cylinders, enjoying a rising tide in an industry dominated by two firms. That being said, given current market conditions, I would advocate taking profits in JOYG into earnings this Thursday. If the company crushes numbers and says all is well in the world, yes the stock may rally. But if it hits its numbers but makes cautionary statements or worse yet, misses numbers altogether, the move lower could be fast and precipitous.

One of the first things I learned at Drexel Burnham Lambert (yes I worked at DBL) in 1986 was that no one ever went broke taking a profit. If JOYG knocks the cover off the ball this Thursday there should be an opportunity to get back involved. A miss however will leave you scratching your head wondering why you didn't take some money off the table and why did that CFO resigned the week of an earnings release. I still love the coal story and JOYG remains one of my favorite names not only in the space, but in the market in general. But given the reasons I have outlined, I think taking the conservative route may be the way to go.
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No positions in stocks mentioned.

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