Are Joy Global Earnings Doomed to Drop?

Joy Global (JOY) will release its quarterly report on Wednesday, and the stock has suffered recently from the weakness in the commodities markets on which Joy's customers rely for their profits. With analysts expecting Joy Global earnings to drop substantially from year-ago levels, though, forward-thinking investors have to wonder whether the long-term picture for the company is actually a lot better than it currently appears.

Joy Global enjoyed a substantial boom during the bull market in commodities, as its stock soared more than 2,000% between 2003 and 2008 and went on to hit even higher levels during 2011. Since then, though, China's slowdown has knocked major commodity markets for a loop, and companies like Joy Global that supply the equipment for miners to produce those commodities have had to deal with the resulting fallout. Let's take an early look at what's been happening with Joy Global over the past quarter and what we're likely to see in its report.

Stats on Joy Global

Source: Yahoo! Finance.

Where are Joy Global earnings headed?
Analysts have gotten even more pessimistic about the prospects for Joy Global earnings in recent months, cutting their July quarter estimates by almost $0.20 per share and their long-range fiscal 2014 projections by $0.85 per share. The stock hasn't suffered too much more than it already had earlier in the year, though, falling just another 5% since late May.

The key reason why Joy Global has suffered such a sharp decline in earnings has to do with its concentration on serving the coal industry. With about two-thirds of its revenue coming from coal-mining companies, Joy Global has had to deal with the second-order effects that low natural-gas prices have had on coal, as prices have fallen so dramatically that even major coal producers have faced substantial strain.

Yet Joy Global certainly hasn't been the only company to feel the pinch from poor commodities markets. Caterpillar (CAT 1.14%) reported earnings last month that were far lower than expectations, as the company had to deal with weakness both in its construction and infrastructure equipment business as well as the mining-equipment segment it bolstered with its acquisition of Bucyrus that it completed two years ago. China was a big problem for Caterpillar, and given that Joy Global has extensive exposure to the Chinese market, those results could bode ill for Joy's earnings prospects.

Rising natural-gas prices, however, have started to boost interest in the coal space, and Joy Global could eventually enjoy a renaissance in the industry if the turnaround continues. With a recent upgrade of the entire coal sector as investment firm Moody's believes that electricity generation demand could rise and pull prices higher as well, Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) have seen their share prices climb as shareholders get enthusiastic about a potential rebound. That in turn could spur more mining-equipment purchases in the long run, as long as the miners don't seek to overproduce and thereby create supply problems.

In the Joy Global earnings report, watch to see how well the company does in its various geographical segments. Further weakness in China could spook investors, but as signs of a possible recovery in Chinese growth start to emerge, they could spell relief from naysayers who are convinced the company's earnings are doomed to drop.

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