BMO: Joy Global Has 30% Upside

BMO Capital Markets’ Joel Tiss reiterated an Outperform rating for Joy Global Inc. (NYSE: JOY), while raising the price target from $16 to $23, despite the company missing FY1Q16 expectations.

Joy Global reported its FY1Q16 adjusted loss per share at $0.23, significantly worse than the BMO estimate of -$0.09 and consensus expectation of -$.011. Despite the miss, the company maintained its full-year guidance of $0.10–$0.50, while mentioning that it expects to be closer to the middle of the range and the adjusted earnings would be backend loaded.

Joy Global’s book to bill was higher than 1, while backlog increased sequentially for the first time since FY2Q14, analyst Joel Tiss mentioned, while adding that free cash flow is expected to be closer to $200 million, versus $150–180 million previously.

Fiscal 2016 Could Be A Difficult Year

Tiss expects FY16 to be another challenging year for Joy Global, as the company’s capacity utilization rate entering the year was close to breakeven, at 35 percent, and mining industry capex continues to be under significant pressure.

“The main variable for this stock rests on when end markets finally show some signs of strengthening as most other factors appear to be extremely well managed by the company,” the analyst wrote.

The EPS estimates for FY2016 and FY2017 have been reduced from $0.35 to $0.15 and from $0.60 to $0.35, respectively.

Upside Potential

“Management is doing an excellent job pulling every lever possible in this challenging environment while still setting the company up well for greater long-term success,” the BMO report noted. “With free cash flow running well ahead of EPS—partly amplified by working capital reductions—a more normalized free cash flow estimate of $140 million (or about $1.40 per share for both 2017 and 2018) times the lower end of the historical valuation range yields a price target of $23.”