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Joy Global Suffers From Dying Coal Industry

Back in 2013, Duke University found that 9% of U.S. coal-fired electricity plants weren’t efficient enough to remain profitable.

But nearly everyone underestimated the challenges that the U.S. coal industry would face.

Fast-forward to today, and the Obama administration is tying an even tighter noose around coal producers’ necks. Obama has tasked the Environmental Protection Agency (EPA) to tighten air quality standards starting in 2016.

And now, in order to meet EPA guidelines, power plant operators using coal are forced to install costly new emission controls.

As a result, Duke University better adjust its findings.

Forget 9% of coal plant operators in jeopardy. With the new rules, it’s more like 56%.

When It Rains, It Pours

Aside from the stringent EPA requirements, the shift to natural gas for electricity generation isn’t helping the coal industry, either.

But you don’t have to tell Joy Global (JOY) shareholders about the troubles in the coal industry…

With about 65% of Joy Global’s worldwide sales linked to the sale of coal-mining equipment, investors have witnessed a nearly uninterrupted decline in the stock after reaching a high of $103.44 in March 2011.

And on March 5, JOY shares fell another 5.2%, sitting the stock just above its 52-week low.

Thank Q1 2015 performance and lower 2015 guidance for Thursday’s snafu.

The company reported total net sales of $704 million in the quarter, a 16% decline against Q1 FY 2014’s revenue of $839 million.

Joy Global said its operating profit for the first quarter totaled $49 million. Compare that to $85 million in the same period a year ago – a decline of more than 42.3%.

The company reported earnings of $0.25 per diluted share, a 48.9% decline over the $0.49 per diluted share reported in Q1 FY 2014.

But perhaps the most disconcerting metrics for Joy Global are the decreases in the company’s bookings and cash position.

Key commodity price declines have created headwinds for the company. Incoming order rates have plummeted by 18.6%, from $860 million to $700 million quarter over quarter.

Cash from continuing operations came in at $18 million in Q1 FY 2015, compared to $65 million in the same quarter last year – a 72.3% decrease. The company said the decrease was due to lower earnings and reduced cash generation from working capital.

Not shockingly, Joy Global lowered its fiscal 2015 revenue guidance. Now, it stands between $3.3 billion and $3.6 billion, down from the $3.6 billion to $3.8 billion originally forecast.

The company also lowered its full-year earnings guidance to a range of $2.50 to $3 per share, down from between $3.10 and $3.50 per share. This is well below analysts’ expectations of $3.20.

A Bleak Future

Joy Global is facing a problem of monumental proportions.

The company’s cost-cutting plans, although prescient, will accomplish little more than slowing the company’s earnings decline.

Without the ability to invest in growth areas in the commodities segment, this will turn out to be a temporary reprieve from the inevitable.

Ultimately, Joy Global’s future is darker than the coal mined by its machines, and investors would be better served moving on to safer investments.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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