Joy Global: Getting Better…Or Is It?

After gaining 6.7% yesterday following better-than-forecast earnings, shares of Joy Global (JOY) are rising again today after Merrill Lynch upgraded the mining company to Buy from Neutral today.

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Not everyone is so sure Joy Global is worth buying. Raymond James analyst Theoni Pilarinos and team think the optimism is priced into Joy Global’s shares:

With commodity prices still under pressure and mining markets in continued surplus, we believe Joy's stock price has already baked in cautious optimism. Strong service revenue, prudent cost management–which should fuel a strong 2H14 (particularly 4Q)–and an improved 2015 outlook have already been incorporated into our numbers. More importantly, we think this optimism has been baked into the stock's current price, which is presently trading at 15x 2015E earnings. Accordingly, we would prefer to wait for a more favourable valuation profile or a more concrete end market outlook before taking a more constructive stance on the stock.

Morgan Stanley’s Nicole DeBlase and team worry about Joy Global’s fourth quarter:

The combination of a decent 2Q and positioning (high short interest) likely drove [yesterday's] 7% gain. However, we are concerned about the achievability of 4Q implied guidance, and still see downside to 2015e cons…

On the call, JOY noted that 3QFY14 EPS will likely look similar to 2Q, which implies a sharp ramp to $1bn+ revenue and $1.09-1.49 EPS (+43-96% Q/Q) in 4Q. With orders of $1.05bn in 2Q, one might be inclined to call this achievable, but $100m of this will not ship until 2016e, and it is probably fair to assume that some of the current $1.6bn backlog will ship in 2015e. As such, JOY will need to book $1bn+ orders in 3Q14 to make 4Q implied guidance achievable. Given that management did not seem to believe that 2Q A/M bookings ($697m) are sustainable, we see the potential for a 4Q miss.

Shares of Joy Global have gained 3.9% to $64.10 at 3:31 p.m. today, and it’s given a boost to Caterpillar (CAT), which has risen 1.2% to $108.26, and Manitowoc (MTW), which is up 2.2% at $29.36.