While the news is filled with hopes of a rebound in iron ore prices, the harsh reality is that my negative thesis on Joy Global (JOY) remains broadly true and each day that passes brings us one day closer to the reckoning.
What has happened since June 18, when I published my last article on Joy Global?
- The stock markets have broadly recovered, even reaching recovery highs. This no doubt helped some basic material stocks, such as BHP Billiton (BHP), recover some of their lost luster.
- Iron ore in China plunged off a cliff, falling in excess of 20% since the start of July.
- Met coal in China followed the same script, falling in excess of 20% since the start of July.
- The budding thermal coal recovery in the U.S. came to a halt due to continuing high production and low prices for natural gas.
All these events confirm the huge problem ahead for Joy Global. People try to cling to takeover speculation and supposedly cheap valuations, together with rosy estimates. The ugly truth, however, is that a large-sized iron ore asteroid is heading toward Joy Global's estimates. And you don't want to own the resulting crater.
The events taking place in several markets -- namely iron ore, coal, and copper -- are leading to at least two observable consequences:
- The necessary huge drop in capex by the coal companies, such as Arch Coal (ACI) and Alpha Natural Resources (ANR). These companies have to stop investing because no new capacity is necessary and because they need to conserve cash given the present coal prices. This is a matter of survival for the companies if they want to have a chance to avoid going bankrupt.
- The cancellation of new projects, exemplified by BHP's deferral of two huge projects.
With coal, met coal, and iron ore seeing cancellations and lower capex, the impact on Joy Global cannot be anything but huge. This will probably be obvious during Joy Global's Aug. 29 earnings announcement, so the time to get out of the stock is running out.
My thesis is broadly unavoidable given Joy Global's positioning as a supplier of production capacity to industries that, right now, don't need much new added capacity. However, euphoric optimism coming from the recurrent Federal Reserve interventions could perhaps drive the stock higher, even against the deteriorating fundamentals. Still, I expect the deterioration to be so obvious as to preclude even that.