A little good news out of China goes a long way for mining stocks like Rio Tinto (RIO) and BHP Billiton (BHP) as well as mining-machinery companies like Caterpillar (CAT) and Joy Global (JOY).
Rio Tinto The Lindsey Group’s Peter Boockvar explains the news out of China:
China's slight improvement in their main manufacturing PMI to 50.8 from 50.4 for May just puts it back to its 2013 average of 50.8 but as we all fear a pronounced China slowdown, the markets are taking the news positively. Export orders and employment remained below 50 but new orders rose to a 6 month high. China has taken some modest stimulus steps and are now afraid of slowing the property market too much as housing restrictions have been eased and selective reserve requirement ratios have been lowered. China's markets were closed overnight but copper is up by almost 1.5%.
Shares of BHP Billiton have risen 0.5% to $68.19 at 2:18 p.m. today, while Rio Tinto has climbed 1.8% to $52.32 and Caterpillar has advanced 1.4% to $103.64. And Joy Global? It’s up 1.8% at $57.98 despite the it will release financial results on June 5. Barclays’ Andy Kaplowitz and team are cautious about Joy Global’s chances but expect to see signs of improvement:
While JOY's results should improve sequentially, we think JOY's overall outlook is likely to remain fairly cautious given global mining machinery end markets that remain in a bottoming process. We do anticipate some sequential improvement in both top line and earnings given typical seasonal improvement in JOY's F2Q and the company's cost cutting efforts; however, given relatively low backlog of ~$1.5bn entering the quarter, we think sequential revenue growth is likely to be more muted than in recent years (we model revenue of $900mn, +7% q/q and -34% y/y). That said, we think operating margin could improve meaningfully vs. F1Q, supported by some better overhead absorption as well as the realization of further cost savings from JOY's restructuring actions (recall, of the ~$75mn in cost savings JOY expects in FY2014 from cost reduction programs, only ~15% was realized in 1Q). With that, we think JOY's decremental margin in the quarter could be in the ~38% range, an improvement vs. a ~42% decremental margin in F1Q, but still below JOY's longstanding target of ~34% as the company continues to adjust to lower overall production volumes. Finally, with JOY having repurchased ~6.4mn shares over the prior two quarters and with ~$664mn of repurchase authority remaining at the end of F1Q14, we think cash returns to shareholders could remain a priority and we expect JOY to have remained active in repurchasing shares during the quarter.
Still, Kaplowitz predicts Joy Global will report a profit of 67 cents a share, below the Street consensus for 71 cents.
A healthier China, it seems, can’t cure everything.
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