Today it was announced that Joy Global (JOY) , the mining equipment powerhouse, is being acquired by Komatsu (KMTUY) . We have talked in the past about Joy being a great franchise, with tangible book value touching its lows earlier this year. Now, with the stock almost three times that level, and being taken out by the Japanese, this morning's news leaves us looking for other companies with the following attributes:
1) Niche dominance
2) Under-earning from a cyclical perspective
3) Quality management
4) Decent "cycle low" cash flow
We don't mind a little leverage at this point in the business cycle for some of these companies. We are operating at very low levels from a capex perspective; these franchises will earn more and generate more cash should activity at least normalize.
So here's my list of JOY read-throughs. They fit the four points above and are market-cap agnostic. There are many others, but here is a summary of my favorites.
Whirlpool (WHR) : While WHR is enjoying a recovery in U.S. housing, the other three regions of the world, Europe, Asia and Latin America, regions where the company dominates, are materially under-earning. The company's management is solid and the capital allocation story, with buybacks and dividend growth, is becoming more and more part of the total return arithmetic. We see valuation expansion as progress is made on the margin front and as the top-line stabilizes, especially in Brazil.
Anixter International (AXE) : We see Anixter as a leader in the distribution of electrical wire and cable, utility MRO products and network and security solutions. Anixter is a leader in this niche and has an amazing corporate culture. CEO Bob Eck answers the phone when employees call. The company has a long history of appropriately managing working capital and paying special dividends when leverage dips below certain thresholds. The current price of metals, especially copper, has depressed some operating leverage. We expect cash flow to accelerate and for Anixter to outperform due to secular growth in the network security arena. This is an underappreciated cyclical at the moment and shares similar attributes to Joy with regard to the four points, above.
ProFire Energy (PFIE) : I recently came across this high gross margin (mid-50%s) equipment and controls manufacturer, based in Utah, that serves the up, down and midstream oil and gas markets. It has dominant leadership in the niches of combustion technology and chemical injection solutions. In addition, the company has good cash conversion at higher levels of sales, which will likely occur as ProFire expands its product portfolio. The balance sheet is pristine, with net cash of $20 million, or one-third of the market cap.
National Oilwell Varco (NOV) : This supplier of oil and gas equipment is the most obvious JOY read-through. Currently still sitting on lows with a decent balance sheet, and amazing aftermarket and strong global dominance, NOV has plenty of dry powder -- for a lot of things. Nothing much has changed since my May 26 commentary on the company, except it signed a technology agreement with Action Alerts PLUS holding General Electric (GE) , which further solidifies the relationship between these two industrial companies.