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(B)(N) JOY Joy Global Incorporated

June 3, 2013

Drama. Joy Global knows “big ore” and how to get it since wheels were invented (allegedly) in 1884 in Milwaukee, Wisconsin and Cleveland, Ohio to take the ore out of the fabled Mesabi Range  in Minnesota and ship it to Cleveland by train and then to Buffalo by boat (Rockefeller).

It’s earnings reports came out last week and although its holding its own, and understands its market, there was not enough traction to lift the stock price and the same could be said for its much bigger brother, Caterpillar Incorporated, which also provides heavy equipment to surface and underground mining and earth moving engines of all sorts (Reuters, May 30, 2013, Joy Global cuts forecast as miners slash spending).

P&H Mining Equipment Example

P&H Surface Mining Shovel

JOY Continuous Miner Product Line

JOY Continuous Miner

Squeezing a word in, we’re not surprised because they are both trading at a discount to the price of risk which doesn’t mean that they’re a bargain or “cheap” but that their stocks are “not quite as good as cash” and won’t be “as good as money” until they are at least “as good as cash”.

That bears some thought but it is not good news for the legions of old-school P/E-analysts and EPS-forecasters because it doesn’t leave them with as much as a bucket to hold their water or a tool to drill down with (The Street, June 3, 2013, The Joy of Global Mining). And they’ll never be able to say that we didn’t tell them.

The dividend yield on Joy is about 1.3% at the current price of $54 which is just below the Risk Price (SF) of $58, and our estimate of the downside in the stock price due to expected volatility is minus (-$5) so that we would not be surprised at any price between the current $54 and $49 to $59, which is quite a significant range. Please see Exhibit 1 below.

Similarly, the current dividend yield on Caterpillar is 2.5% at $83 and it’s trading at a significant discount to the current Risk Price (SF) of $94 (please see Exhibit 2 below). Our estimate of the downside in the stock price due to the expected volatility is also minus (-$5) and it could be trading between $78 and $88 without surprise.

For more on the “price of risk” and what it means, please see the References below.

Exhibit 1: (B)(N) JOY Joy Global Incorporated – Risk Price Chart

(B)(N) JOY Joy Global Incorporated

(B)(N) JOY Joy Global Incorporated

Joy Global Incorporated  is a manufacturer and servicer of mining equipment for the extraction of coal and other minerals and ores. The equipment is used in the mining regions globally to mine coal, copper, iron ore, oil sands, and other minerals.

(Please Click on the Chart to make it larger if required.)

From the Company: Joy Global Inc. engages in the manufacture and servicing of mining equipment for the extraction of coal, copper, iron ore, oil sands, and other minerals. It operates in two segments, Underground Mining Machinery and Surface Mining Equipment. The Underground Mining Machinery segment produces continuous miners, longwall shearers, powered roof supports, armored face conveyors, shuttle cars, flexible conveyor trains, roof bolters, battery haulers, continuous haulage systems, feeder breakers, conveyor systems, high angle conveyors, and crushing equipment; rebuilds and services equipment through a network of service and distribution centers; and sells replacement parts and consumables in support of installed base. The Surface Mining Equipment segment produces electric mining shovels, wheel loaders, walking draglines, and rotary blasthole drills for open-pit mining operations. This segment also provides logistics and life cycle management support services; equipment assemblies, relocations, inspections, service, repairs, rebuilds, upgrades, used equipment, parts, enhancement kits, and training; and electric motor rebuilds, and other products and services to the non-mining industrial segment, as well as sells used electric mining shovels, drills, and parts. This segment’s products are used in mining copper, coal, iron ore, oil sands, silver, gold, diamonds, phosphate, and other minerals and ores. The company serves mining companies worldwide. Joy Global Inc. was founded in 1884, has 18,000 employees, and is headquartered in Milwaukee, Wisconsin.

Exhibit 2: (B)(N) CAT Caterpillar Incorporated – Risk Price Chart

(B)(N) CAT Caterpillar Incorporated - May 2013

(B)(N) CAT Caterpillar Incorporated – May 2013

Caterpillar Incorporated is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It also provides financial services through its subsidiaries.

(Please Click on the Chart to make it larger if required.)

From the Company: Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company’s Construction Industries segment offers construction machinery and related parts, including backhoe, skid steer, multi-terrain, track-type, skid steer, compact, and wheel loaders; track, wheel, and mini excavators; track-type tractors; motor graders; and pipelayers for the heavy construction, general construction, mining and quarry, and aggregates markets. Its Resource Industries segment provides electric rope and hydraulic shovels, draglines, drills, forestry products, highwall miners, off-highway and articulated trucks, electric drive mining trucks, wheel tractor scrapers, compactors, mining trucks, wheel dozers, paving products, tunnel boring and underground mining equipment, electronics and control systems, industrial swing machines, and machinery components for mine, quarry, forestry, paving, tunneling, industrial, and waste customers. The company’s Power Systems segment offers reciprocating engine powered generator sets; integrated systems for the electric power generation industry; reciprocating engines, and integrated systems and solutions; turbines and turbine-related services; and diesel-electric locomotives and components, and rail-related products and services. Its Financial Products segment provides retail and wholesale financing alternatives for Caterpillar equipment, machinery, and engines; offers property, casualty, life, accident, and health insurance, as well as insurance brokerage services; and purchases short-term receivables. The company markets its products through its sales force, distribution centers, dealers, and distributors. It was formerly known as Caterpillar Tractor Company and changed its name to Caterpillar Incorporated in 1986. The company was founded in 1925, and has 125,000 employees, and is headquartered in Peoria, Illinois.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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