As Axiom explains, “global mining CAPEX grew more than +27% compounded during the last mining supercycle (’01-to-’12).” But it’s expected “to fall an unprecedented -19% compounded ’12-to-’15 due mainly to deteriorating commodity market fundamentals.” Axiom notes that Joy Global Inc. (NYSE:JOY)’s sales tend to closely approximate gains and losses in overall global mining equipment spending — on the order of 98% correlation. As a result, what’s true for the global industry should be true for Global as well — and this means a steep, sustained falloff in revenues over the next few years. Axiom notes that last time the mining industry got unpopular, Joy Global Inc. (NYSE:JOY), “known then as Harnischfeger Industries … went bankrupt.”
Ominous words indeed. But you don’t even have to buy this doomsday scenario to know that all is not well with Joy Global.
Right now, Joy Global Inc. (NYSE:JOY)’s generating real cash profits of only $0.32 for every $1 it reports in earnings. So while the stock may look attractive at a “P/E” ratio of less than 8, it looks less attractive when viewed as a 24 price-to-free cash flow stock. With long-term earnings growth projected at 9% over the next five years, the stock looks overpriced to me. If Axiom’s right, and earnings go down 19% annually, instead of up 9%, the stock could be even riskier than it already looks.
May I see the dessert menu, please?
So… sour news all around so far. Let’s end, then, with something a bit sweeter. The Cheesecake Factory Incorporated (NASDAQ:CAKE) scored a hike in price target from analysts at Miller Tabak today. Miller’s saying the stock, currently priced under $42 a share, is worth closer to $45 — and recommends buying it.
I don’t agree necessarily, but I’m at least not as worried about this stock falling as I am about Tesla and Joy. Here’s why:
Priced at 22 times earnings, The Cheesecake Factory Incorporated (NASDAQ:CAKE) looks expensive for its 14% growth estimates. But the stock’s not quite as bad as it looks. Unlike Tesla, and unlike Joy Global, Cheesecake generates more free cash flow — $114 million — than it reports as net income — just $103 million. It’s also got a rock-solid balance sheet, showing $31 million more cash than debt, and to top it all off, The Cheesecake Factory Incorporated (NASDAQ:CAKE) pays its shareholders a modest 1.2% dividend.
Mix it all together, stir well, and bake at 350 degrees for 15 minutes and here’s what I think you get: The Cheesecake Factory Incorporated (NASDAQ:CAKE) stock costs about 18.5 times the amount of cash it generates in a year. Between the dividend and the growth rate, I think it’s modestly overpriced today. I’d want to see the stock price fall by about 20% or so before buying in at current growth estimates, or else I’d want to see evidence that the company can keep growing at the 22% rate it grew profits last quarter — sustainably, and over a multiyear time frame.
In short, the stock’s not well-enough “done” for my taste right now, but reset the timer and check back in a few weeks. So far, this is the most appetizing analyst rating Wall Street has put on the menu today.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors.
The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com.
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