Joy Global (JOY) announced a rise in its second-quarter profits Thursday, but lowered its 2012 earnings forecast this morning. So now the company is looking at a range of $7.15-$7.45. Originally the forecast was $7.40-$7.80. Its new orders also dropped 19% to $1.23 billion. Joy Global has enjoyed double-digit year-over-year percentage revenue growth for the past four quarters. So why is it that the stock price has fallen 34.3% since February 28, 2012, from $91.59 to $60.21? The present forecast says it all.
Analyst sentiment has waned during the last three months. I do not believe the stock will stay down all through the year, but presently the two main reasons why the stock has dropped so far off its high are coal and copper.
Stock Price Influenced by Coal Production
Over 60% of Joy Global's revenue comes from coal mining customers. In Q1 of 2012, coal output was 2.4 million tons vs. 2.7 million tons in the previous quarter. This decline was the beginning of buying new mining equipment. Metallurgical coal production was 4.0% lower than Q4 2011. Thermal coal output decreased 19.7% quarter on quarter. By the end of March, coal prices were in a complete holding pattern. The global economic downturn was under way, and fears rippled through the a slowdown Asian markets. News of slowing demand coming out of both energy and steel markets in Asia has been the major driving force slowing coal markets across the globe.
Secondary Influence: Copper Prices
Copper forms the second largest customer for Joy Global. Nine of 18 analysts surveyed by Bloomberg expect the metal to drop. Manufacturing in the 17-nation euro area slumped to the weakest in almost three years this month and may shrink for a seventh month in China, which accounts for about 40% of global copper consumption. China's refined copper imports slid 21% in April from a month earlier. Copper tends to be a reasonably good signal of what's going on in the real world. This is a real challenge for Joy Global to see its two top markets slumping because of global macroeconomic struggles.
But the stock looks like it has reached a critical bottom and will rebound by the fourth quarter of this year. We are positioning ourselves to capture this rebound with a short-term income play.
The Options Play
- Buy an October 2012 call with a strike of "62.50" (priced at $7.65)
- Sell an October 2012 call with a strike of "65.00" (priced at $6.30)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
Reasoning Behind the Trade
- Looks like Joy Global finally has built a foundation.
- Second half of year expected to look better economically.
- October gives us a cushion for extra time if needed.