Tuesday, November 16, 2010

Joy Global (NASDAQ:JOYG): Underweight on Valuation & New Competitor in CAT - Morgan Stanley

Morgan Stanley is downgrading Joy Global (NASDAQ:JOYG) to Underweight from Equal-Weight with a $71 price target (prev. $64). The moves comes after Caterpillar announced the acquisition of Bucyrus, JOYG's main competitor.

Conclusion: Morgan Stanley is downgrading JOYG shares to Underweight; risk reward is not favorable and the frim thinks it’s a good time to take profits. They remain very bullish on the mining cycle but prefer CAT for mining exposure. Their ‘11 and’12 ests are 3% and 11% below cons, even after bumping their up a bit. Near-term they see few pos catalysts, with potential downside from underwhelming orders. Longer term the firm expects more hydraulics gain and see CAT as a tougher competitor.

Morgan Stanley sees 3 effects from CAT's bid for BUCY, none of them positive for JOYG

1) JOYG shares appreciated 7% on CAT's bid for BUCY, presumably on the attractiveness of JOYG as a unique asset for strategics or investors. In fact, they think the opposite should've happened, to the extent a bid from CAT was in the JOYG share price a potential positive is off the table. CAT’s bid for BUCY was 14x MSCO's 2012 est (15x cons); JOYG currently trades at 15x their 2012 est, and almost 14x consensus 2012.

2) Competitive intensity increased. BUCY had already been selling bundled product against JOYG, with CAT"s added product and service expertise, the intensity will be higher. Firm sees increased difficulty in meeting consensus estimates. They also have been longstanding believers in hydraulic mining excavators taking share from electric/rope shovels, a trend that seems to be cyclically accelerating.

3) Though less important the consolidation raises the risk that JOYG will see a need to broaden its product line. High quality hydraulic excavator will be difficult to find, other mining assets may be less attractive vs Bucy's very accretive acquisition of TEX mining or CAT's excellent fit with BUCY.

Notablecalls: Call makes sense. JOYG traded 8 million shares yesterday, which means there are trapped longs there.

I think people will be gunning for the $75 level today to inflict maximum pain.

PS: We have couple of firms out raising their tgts on JOYG but it's probably not enough to counter the MSCO downgrade. Also note that Sterne Agee is out with a downgrade. They have been positive on JOYG since mid-2009.

PPS: Am I the only person out there that finds MSCO telling people to take profits here somewhat idiotic considering they have been Equal-Weight rated in the name for ages?

1 comment:

wayne said...

good call...if there's anyone left to trade!!