Perhaps the best news for Joy Global Inc. (NYSE:JOY) is that China’s coal orders are beginning to ramp up, which means sales for the world’s number two manufacturer of mining equipment. Can you guess who the number one company is? If you guessed Caterpillar Inc. (NYSE:CAT), then you guessed correctly.
But, for mining equipment companies to do well, the companies that do the mining must also be doing well – companies like Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP). Sometimes the mining companies try to increase production by more efficiently exploiting the mines already being used rather than starting new ones (both of which involves buying new equipment to achieve the desired results).
Most analysts believe that both Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP) are looking strong for 2013. Also, both mining companies are trimming their costs in billions and are upbeat about the Chinese economy, which in turn should produce solid numbers for both Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP) in the future. Backed by a strong economic recovery in the key emerging markets, both companies expect current revenues to increase by mid-teens in the year 2014.
Caterpillar or Joy?
With the Chinese stage set to help both companies do well in 2013, which company will be seizing that opportunity from a better position? Caterpillar had an overall record year in 2012, with a 10% increase in net sales, a 15% increase in profit per share and its 19th consecutive dividends hike that puts the yield at 2.5%. Joy Global, on the other hand, is beating Caterpillar on gross margin and even though its debt situation was better than Caterpillar Inc. (NYSE:CAT)’s before it took on the IMM acquisition, it is working hard to wipe out as much of the debt from that deal as possible.
Both companies were hit hard in the US by the drop in natural gas prices in 2012, which resulted in many companies switching from coal to natural gas for power generation. With natural gas prices back on the rise, coal production should see a significant bump this year, which would allow both companies to benefit from increased coal demand. Combining those domestic prospects with the rising demand in China, both companies ought to see a significant appreciation in share prices.
The bottom line
With key economic indicators (electricity, commodity orders) pointing towards recovery for the Chinese economy, both Caterpillar and Joy Global Inc. (NYSE:JOY) are poised to take full advantage of the slumbering giant as it reawakens. With both stocks currently trading near six-month lows, those prices are sure to rise significantly with the Chinese economy. Now would be the time to add both to your portfolio.
The article Construction and Mining: The China Connection originally appeared on Fool.com is written by Nauman Aly.
Nauman Aly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nauman is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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