I profiled two beaten down picks in the steel sector Tuesday that are good speculative plays on the improving Chinese economy and higher iron prices that are being driven by increased demand from that region. Since that column ran, several positive catalysts in the news have confirmed that growth and demand from China is indeed on the mend. Chinese exports surged in December in the mid-double digits and imports rose 6%. Also, Morgan Stanley joined Goldman Sachs on Wednesday and recommended buying the Chinese market on the improved growth outlook. Finally, Alcoa (AA) reported better-than-expected revenue to kick off earnings season, and it had positive comments on Chinese demand.
A stock that should do well on the back of increased demand from China is one of the largest mining-equipment companies in the world, Joy Global (JOY). It manufactures mining equipment for the extraction of coal, copper, iron ore, oil sands and other minerals.
Five reasons JOY has offers upside from just under $68 a share:
- Anyone watching CNBC this week has seen more and more analysts getting on the "buy cyclicals now" train. JOY is driven on the margin by Chinese coal demand, which should pick up with its improving economic growth.
- This change of sentiment should translate to upgrades for the shares in the coming months. Piper Jaffray just upgraded the shares this week to Outperform and TheStreet just reiterated its Buy rating as well. I would look for other analysts to follow suit, providing a tailwind to the shares. The stock traded north of $95 earlier in 2012, and I believe the shares can approach that level again, provided the positive trajectory of the Chinese economy continues.
- The stock is selling at just over 10x forward earnings, a discount to its five-year average (13.2).
- JOY is priced near the bottom of its five-year valuation range based on price/earnings, price/cash flow and price/book ratios.
- After bottoming in the middle of the summer, the stock's technical picture has brightened. It has spent most of the past six months making higher lows and higher highs. It also just crossed its 200-day moving average (see chart).
Wildcard: I put a low percentage on this possibility, but it does need to be factored into my investment decision. General Electric (GE) has been aggressive about reducing its exposure to its financing arm while increasing exposure to industrial business such as oil & gas services and mining. It has tripled its revenue from energy services to $15 billion since 2005. Its mining equipment revenues are much smaller at around $2 billion annually. Given GE's desire to grow its industrial businesses, however, JOY could be a logical acquisition candidate. It has less than a $10 billion market capitalization, large exposure to emerging markets such as China, and would integrate well with GE's manufacturing expertise.