See Your Joyous Future in Commodities

Whether you are already in position, or were awaiting further clarity, a fresh chapter in the ongoing bull market for commodities has arrived.

Fools will recall that equipment manufacturer Joy Global (Nasdaq: JOYG  ) has consistently provided earth-moving heaps of commodity-market insight with each successive quarterly report. Let's see what the Oracle of Milwaukee had to offer investors in its latest installment of the ultimate commodity update.

Joy Global spread happiness this week with earnings of $0.73 per share, exceeding analyst expectations. Net sales dipped 3% from the prior-year mark, to $729 million, while operating income slid nearly 13%, to $118 million. Prior-year results were buoyed by the enormous order backlogs that accumulated prior to the market downturn, cushioning Joy Global and rival Bucyrus (Nasdaq: BUCY  ) through a period of marked weakness in new equipment orders.

Today, with a vastly improving fundamental outlook for commodity demand coming into clear view, a 5% sequential increase in Joy's order backlog accompanies a stabilizing environment for new equipment orders. Following a year in which expenditure rationalization by clients resulted in atypical concentration in demand for aftermarket parts, the latest 22% jump in new orders from year-ago levels is instead dominated by orders for original equipment ... especially for surface mining equipment destined for the coal and copper mining industries.

Corroborating previews from Peabody Energy (NYSE: BTU  ) and Arch Coal (NYSE: ACI  ) of an abrupt acceleration in inventory declines that began in December at U.S. utilities, Joy Global notes that "the U.S. thermal coal market is correcting faster than expected." After peaking above 200 million tons in September, inventories are already approaching 150 million tons, and indicators point to a return to normal levels during the second half of 2010.

This improving outlook comes as a big relief for shareholders of less export-ready coal producers like CONSOL Energy (NYSE: CNX  ) ; and also foretells of a moderating grade in the tracks ahead for coal-heavy railroad operators like CSX (NYSE: CSX  ) .

Revealing important capacity utilization metrics for both the steel industry and broader industrial production, Joy Global delivers updated insight that is not only relevant for steel investors, but also for every Fool eager to track what I consider the most important leading indicators for sustainable economic recovery. By the end of 2009, Joy Global indicates, steel-sector capacity utilization in the "industrialized countries" rebounded to beyond 65% from those gut-wrenching lows of the year.

Similar to the backlog work-through that characterized most of 2009 for the equipment manufacturers, in Europe and the U.S. the year was essentially one of inventory destocking. Rebounding capacity utilization marks the conclusion of that cycle, but underlying demand remains downright stinky, according to the insightful management at Nucor (NYSE: NUE  ) .

Broader industrial capacity utilization in these same countries recovered from just more than 60% at its worst, to slightly more than 70% by year's end. Stabilization is of course a welcome development, but the new normal remains a faint reflection of its former self.

Meanwhile, the incredible pace of growth in Pan-Asian economies like China and India continues to render that age-old construct of "industrialized nations" something of a misnomer. Although Joy Global sees the pace of growth in China's demand for commodity imports leveling off for a time, sustained growth at today's remarkable levels provides more than enough impetus for miners to chase production increases and rationalize more robust capital expenditures.

Looking to coal, Joy Global reiterated Peabody Energy's interpretation of a major structural shift in these markets, driven by China's transformation into a net importer of both thermal coal and coking coal. Total Chinese coal imports reached 100 million tons in 2009, but this is merely the beginning of a long-term trend.

Joy Global reports that Coal India -- reportedly the largest coal producer in the world -- now anticipates annual import demand from India reaching an incredible 200 million tons within the next few years. A recently reduced outlook for domestic production drives this bullish call. Fools will recall that industry expectations for Indian import demand for coal in 2013 stood at just 80 million tons as recently as June 2009. With these sorts of multiyear drivers in play, it's no wonder that producers in places like Australia are pulling out all the stops to ramp up export capacity. As I have stated previously, I consider investment exposure to Pacific basin seaborne coal one of the most attractive opportunities for investors today.

Of course, all of these bullish long-term indicators for commodities like copper, iron ore, coking coal, and thermal coal result in a strong business environment in which mining equipment rivals Joy Global and Bucyrus will continue to vie for dominance. After a key strategic acquisition, I see Bucyrus with the upper hand, but Joy Global's $0.20-per-share upward revision to the low end of its 2010 earnings guidance reminds Fools not to underestimate the happiest name in mining equipment.

No matter which vehicles Fools select to participate in the coming phases of this commodity bull market -- or even for those on the sidelines -- Joy Global's comprehensive updates continue to set the standard for industrial-sized insight.

The "Coal" tag in the Motley Fool CAPS community lists 28 companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Peabody Energy and Arch Coal. The Motley Fool scrubs its disclosure policy before releasing it into the atmosphere.


Read/Post Comments (3) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2010, at 9:20 PM, XMFSmashy wrote:

    Great stuff, Chris. I don't follow the coal markets actively these days, but you always quickly get me up to speed.

    TS

  • Report this Comment On March 13, 2010, at 10:43 PM, Bays wrote:

    No kidding.

    Thanks for the overview. I love the Twitter page btw. Not sure why the MF doesn't allow you to click on the blogger's name to see his/her other blogs.

  • Report this Comment On March 13, 2010, at 10:44 PM, Bays wrote:

    No kidding.

    Thanks for the overview. I love the Twitter page btw. Not sure why the MF doesn't allow you to click on the blogger's name to see his/her other blogs.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1128129, ~/Articles/ArticleHandler.aspx, 11/23/2014 2:39:55 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement