For Immediate Release
Chicago, IL – June 7, 2010 – Zacks.com Analyst Blog features: Joy Global Inc. (JOYG), Sunoco Inc. (SUN), Tesoro Corp. (TSO), Valero Energy Corp. (VLO) and Western Refining Inc. (WNR).
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Here are highlights from Friday’s Analyst Blog:
Joy Global Beats, Ups Guidance
Joy Global Inc. (JOYG) reported adjusted earnings of $1.15 per share in the second quarter of fiscal 2010, compared with $1.17 per share in the year-ago period. EPS results came in 38 cents higher than the Zacks Consensus expectation of 77 cents.
The results were better than the average forecast primarily attributable to improvement in North America and strong international demand.
Operational Update
Joy Global reported net sales of $896.2 million, which declined 3% year over year from $923.5 million reported in the second quarter of 2009. Original equipment revenue was down 9% on a year-over-year basis, while the aftermarket revenues were up 2% from the year-ago period. The decline in original equipment sales was due to a lower level of backlog, while the improvement in aftermarket sales was attributable to increased demand in South America.
Joy Global’s operating profit in the current quarter was $181 million versus $188 million in the year-ago period. The positive impact from the favorable material cost variance, sales mix and benefits of the 2009 cost reduction programs was offset by negatives like the decline in sales volume, unfavorable manufacturing overhead absorption from factory load, higher performance based compensation and increased pension expense.
Joy Global generated a net income of $120 million, which was at par with last year’s second quarter. Net income in the reported quarter included a $2 million pre-tax reduction in interest expenses.
Guidance
Although Joy Global expects some near-term uncertainty, it is confident that industry fundamentals will lead to a robust demand over the longer term. The company’s revised full-year revenue guidance is in the range of $3.3 to $3.4 billion, up from the previous view of $2.8 billion to $3 billion. Joy Global expects full-year earnings per share to range between $3.85 and $4, up from the previous expectation of $2.85 to $3.05 per share. The Zacks Consensus Estimate for Joy Global is 78 cents for the third quarter and $3.10 for the full-year 2010.
Our View
We are encouraged by the strong long-term fundamentals of the mining industry and improving conditions in the U.S., China and India , which will likely have a positive impact on the long-term prospects of the company. The sovereign debts issue in Europe and the new proposed Australian tax remain causes for concern. We presently maintain our Neutral outlook and expect Joy Global to perform in line with the broader market.
EIA Reports Positive Inventory Data
The U.S. Energy Department’s weekly inventory release showed a larger-than-expected decline in crude stockpiles, while gasoline supply logged another surprise decline. The agency’s report further added that inventories of distillate fuel posted a smaller-than-expected rise, and refinery capacity use fell.
The inventory data was mostly positive, in light of the higher-than-expected crude and gasoline inventory draws, and lower-than-anticipated distillate stockpile build. However, product inventories (gasoline and distillate stocks) remain above the upper boundary of the average range for this time of year, along with soaring commercial oil supplies.
We take this as a sign that energy consumption in the world’s biggest economy remains slack and there is no problem with the commodity supply. As such, the latest EIA report is not as fundamentally bullish as it looks.
In particular, we maintain our cautious view on the refining sector. While we currently don’t have any Sell-rated stocks in this group, we believe upside will be limited over the next few months and the group will likely underperform both the broad market and other energy sub-sectors.
Margins have been quite robust in the current quarter, helped by the European debt crisis, depressed oil prices, higher U.S. exports and better-than-expected demand. However, we believe that the relatively stronger margins are unlikely to persist, as refiners increase production with more conversion units resuming operations from their turnaround activities. Utilization rates are likely to hover around the high 80’s/low 90’s during the near-term amid too much supply of petroleum products.
Though margins have rebounded from the troughs of the fourth quarter, they still remain way off the levels achieved a few years ago, and are insufficient for refiners to get back into the black.
As such, we have a bearish stance on companies like Sunoco Inc. (SUN), Tesoro Corp. (TSO), Valero Energy Corp. (VLO) and Western Refining Inc. (WNR), given that the overall environment for refining margins is likely to remain poor.
All the above-mentioned companies currently have Zacks #3 Ranks (Hold), meaning that these stocks are expected to perform relatively the same as the overall market during the next 1-3 months. Therefore, investors should maintain their current positions in the stocks over this time period.
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