Particularly at the onset of such a palpable market crossroads, when bullish long-term outlooks are suddenly trampled by a mad dash for cash, discerning commodity investors will bend their ears to Joy Global (Nasdaq: JOYG) -- the Oracle of Milwaukee -- for superior insight into the state of global commodity demand.
Amid this backdrop of skittish market sentiment, equipment manufacturer Joy Global delivered a resoundingly successful fiscal second quarter that featured a 32% increase in earnings per share (corresponding to record net income of $162 million). The manufacturer also logged fresh company records with equipment bookings of $1.5 billion (a 46% increase) and an operating margin of 22% (a 200 basis-point improvement).
The result permitted an upward revision to the company's full-year guidance, adding $100 million to the revenue target, and bringing the earnings forecast to between $5.30 and $5.60 per share. The bullish outlook consoled a struggling U.S. industrial sector at a moment when negative data is weighing on the market like an anvil. The shares were promptly rewarded with a surge that nearly touched 7% Thursday morning, while shares of rival mine supplier Caterpillar (NYSE: CAT) barely budged.
Why Joy Global is an oracle for commodity investors
The mining industry walks at a remarkably slow pace. Sure, once a project is up and running, the giant machines built by the likes of Joy Global move material at an impressive clip, but the "lead time" between preliminary discovery of a potentially economic resource, and the commencement of mining operations, is typically a process measured in years. As mine plans are conceived, formalized, tweaked, and expanded in the run-up to a mine's construction, equipment suppliers are routinely engaged in the planning process.
As Joy Global President and CEO Mike Sutherlin explains: "We have an extremely good view of active mine expansion projects through our early work directly with customers for pre-engineering and project planning." When recent Barrick Gold (NYSE: ABX) acquisition Equinox Minerals contemplates a doubling of production capacity at its flagship Lumwana mine in Zambia, for example, the equipment manufacturer will know about it ... along with most similar plans hatched around the globe. As a result of those consultations, Joy Global is able to keep its finger squarely on the pulse of the global mining industry and the major trends unfolding with respect to both new mine construction and pending expansions to existing mines.
Reading the tea leaves for copper and coal
Now that we've established the company's sweeping global vantage point, a reading of the tea leaves may help to soothe the recently rattled nerves of many commodity investors. In a nutshell, the company's message is this: "Mining industry fundamentals remain solid even if the outlook is for slower economic growth." I agree, which is why even as I sought to raise my own cash allocation in recent days to defend against the potential for a near-term sell-off in the broader equity market, my own basket of long-term holdings in the mining sector remained essentially untouched.
Sutherlin observes that Joy Global's customers "continue to move forward with mine expansion plans based on the strong belief that current capacity must be increased significantly to keep up with demand growth, even if the demand pace moderates." Indeed, Joy Global logged a 79% year-over-year increase in new orders for original equipment, a massive jump in any economic climate. The company's total backlog grew to $2.6 billion, which is $700 million beyond where the backlog stood in early 2008 before the financial crisis sent commodity producers into a temporary tailspin.
Looking to copper in particular -- which I recently highlighted as a particularly attractive commodity for timely new investment -- Joy Global avows that "[c]opper fundamentals are among the strongest of all commodities." The company interprets slowing imports by China so far this year as a de-stocking cycle that is likely to be followed by a rebuilding of stockpiles during the second half of the year. I continue to view the First Trust ISE Global Copper Index Fund (NYSE: CU) as a compelling target for new investment into any further market weakness. I believe this bullish long-term setup for constrained copper supply will tend to lift the entire sector, and I believe the fund's top holdings -- including Freeport-McMoRan Copper & Gold (NYSE: FCX) and Ivanhoe Mines (NYSE: IVN) -- are bound to join Joy Global in experiencing a steady boost from the trend.
Contracting global growth estimates aside, Joy Global still expects India to double its coal imports from 70 million tons last year to 140 million tons in 2012. For all the talk of a relative slowdown in China, the nation's coal-fired power generation increased by 12% during the first four months of 2011. Steel production grew 7% over the same period, and stockpiles of both thermal and metallurgical coal have been depleted as buyers were initially reluctant to purchase supply as coal prices rose.
In the final tally, Joy Global's earnings report offers a timely reminder that the long-term outlook for coal and copper demand, in particular, will not be wiped away by a sudden downtick in global growth expectations. As a significant producer of both copper and metallurgical coal, I believe that Teck Resources (NYSE: TCK) is particularly well-positioned to enjoy enhanced long-term profitability for both of its primary products. I encourage Fools to keep some cash on the sidelines in case we do experience a material pullback across the equity markets, and to consider a mining equipment maker like Joy Global as an attractive stock to target in the midst of such a sell-off.
- Add Joy Global to My Watchlist.
- Add Caterpillar to My Watchlist.
- Add Barrick Gold to My Watchlist.
- Add Teck Resources to My Watchlist.
- Add Ivanhoe Mines to My Watchlist.
