UBS Downgrades Joy Global (JOY) to Sell

(Updated - January 4, 2016 8:26 AM EST)

UBS downgraded Joy Global (NYSE: JOY) from Neutral to Sell with a price target of $8.00 (prior $9). Analyst Steven Fisher thinks earnings will continued lower as commodity headwinds intensify, and in his view consensus is not reflecting the full magnitude of challenges.

"We are downgrading to Sell, as we believe the inflection in earnings that consensus is forecasting in FY16/17 (FY16 trough, FY17 recovery) reflects an overly optimistic scenario," said Fisher.

The analyst continued, "Our mining and coal capex analysis indicates further declines in JOY customer spending are likely to extend into FY17. We see further downside to coal and other mining activity over the next two years. Coal markets are under particular pressure, as cheap natural gas induces utilities to switch from coal to gas, and environmental concerns lead countries to shift away from relatively carbon intensive coal fired power. Meanwhile, China imports are in decline, as the country is trying to prop up domestic supply, while also shifting its power consumption toward cleaner sources. Reflecting these headwinds, UBS has recently cut its coal price forecasts. The outlook for copper is also challenged; UBS recently lowered its 2016 copper price forecasts to under $2/lb."

Fisher added, "As commodity headwinds intensify, we believe rebuild activity could get deferred, pressuring JOY's Service segment revenues, while further equipment orders may not materialize. We also think the revenue headwinds facing Joy will also be challenging for the balance sheet. We think Joy's leverage will rise to 3.5x in 2016. We think Joy will have to sustain a steady level of cash flow over the next several years to manage debt levels. We see this as possible, but it does not leave much room for further fundamdental deterioration."

For an analyst ratings summary and ratings history on Joy Global click here. For more ratings news on Joy Global click here.

Shares of Joy Global closed at $12.61 yesterday.

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