Joy Global (NYSE: JOY ) investors have had a turbulent ride so far this year, and December may turn out to be no different. The mining-equipment maker will report its fourth-quarter numbers this Wednesday. While the past quarter has seen the stock climbing 13%, a bummer of an earnings report could wipe out those gains in no time.
With rival Caterpillar (NYSE: CAT ) having announced massive restructuring and layoffs in recent weeks, and expected to maintain a dour outlook through 2015, Joy Global investors certainly don't have much to look forward to. But since the upcoming earnings release will provide valuable insights into what 2014 holds for Joy Global, investors can't afford to miss the Wednesday event. Will it be a pleasant surprise, or a jarring shock?
Ignore the banter on the Street
Joy Global managed to trump Street estimates in each of the past four quarters. Analysts project the company's fourth-quarter earnings per share to drop 45%, backed by 30% lower revenue. Since those are pretty low estimates, I'm not ruling out the possibility of another surprise from Joy Global this Wednesday. But a small gap up would in no way mean that the company's fortunes are about to turn a corner.
The key metric you should look for
While the fourth quarter traditionally has been strong, Joy Global's backlog has depleted rapidly in recent months. Backlog value, which indicates future potential revenue, has slipped 38% so far this financial year. With the downward trend expected to continue into the fourth quarter, Joy Global's revenue could shrink considerably in 2014.
Keep a watch on new orders and bookings, since they hold the keys to Joy Global's performance. Though Joy Global expects its fourth-quarter bookings to increase sequentially, they cannot be substantial as long as mining doesn't increase capital spending. Caterpillar doesn't expect a reversal anytime soon. Lower than expected orders for mining equipment have not only compelled Caterpillar to slash its 2014 outlook – it expects revenue to be flat to 5% lower – but also to close the shutters on some of its plants. Caterpillar has announced closures for three mining-equipment facilities over just the past couple of months.
Neck-deep in trouble?
Joy Global could be headed for deeper trouble since it is heavily exposed to the mining industry. Caterpillar, on the other hand, gets a greater portion of revenue from the sale of construction equipment.
Worse yet, Joy Global gets roughly two-thirds of sales from coal-mining companies, most of which are battling a slowdown at the moment. Arch Coal (NASDAQOTH: ACIIQ ) , the second-largest coal producer in the U.S., has cut its capital expenditure nearly by half since 2011. Arch Coal expects further reductions next year, and is resizing operations, disposing of non-core assets, and cutting back operating expenses. Until major coal companies like Arch Coal start moving the earth again, Joy Global has a lot to worry about.
Moreover, key market China remains a major concern for Joy Global. In its last earnings call, the company predicted China's bottoming to be several quarters away. If it reiterates its views on Wednesday, investors should mark it as a yellow flag.
Facing the storm
Such challenging business conditions put to test Joy Global's ability to use existing resources effectively. With Caterpillar aggressively cutting costs, investors should keep an eye on how Joy Global plans to maintain its margins.
Chances are that Joy Global may also have to cut back production substantially as it enters the new year. In its upcoming earnings call, look for any cost-cutting initiatives that the company has lined up for 2014. With revenue drying up, any savings will help the company weather storms in the near future.
The surprise, and the wait
Stronger free cash flows will likely be the surprise element in Joy Global's upcoming earnings report. But since that'll be a result of lower inventory and capital expenditure instead of higher income, don't get too excited.
During its third quarter, Joy Global announced a share repurchase program worth $1 billion to return some of that extra cash to shareholders. That may sound good, but it will also artificially pump up the company's earnings per share if net profits continue to fall. That could support share prices, but investors looking for real returns from the company should prepare for a long and painful wait. Joy Global will perhaps give you an idea about how long that wait could be this Wednesday.
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