If you follow the mining industry closely, mark March 6 on your calendars. One of the leading mining equipment companies, Joy Global (JOY), will check in with its first-quarter numbers and outlook for the full year. Though the mining industry is still in the doldrums, the market seems to have turned hopeful. After a disastrous start to the year, Joy Global shares bounced back in February to gain 6%, with Deutsche Bank even initiating coverage on the stock.
But recent numbers and guidance from industry players present a different picture. If major coal producer, Arch Coal (NYSE: ACI) forecasts similar business headwinds for 2014 as last year's and Joy's closest rival, Caterpillar (CAT -1.17%), projects revenue from its mining equipment division to drop another 10% in 2014, market bulls could be disappointed.
So what should Joy Global investors do? To understand whether the company, and the stock, is really on the road to recovery, they must watch out for the following when Joy reports numbers this week.
Don't jump if Joy's revenue jumps over estimates
Lower revenue seems to have become the new normal for Joy Global. Analysts project its first-quarter revenue to decline 27% year over year. That's terrible, but sounds better than Caterpillar's 48% fall in last-quarter sales from its resource industries, or mining, division.
But since revenue for Joy Global reflects the deliveries of old orders, it hardly says anything about the future. So don't get excited if Joy beats revenue estimates this week. The new orders and backlog numbers hold the real answers to where the company's headed, and that's where your attention should be.
Keep the bar low
Unfortunately, during its last earnings call, Caterpillar mentioned how orders for new mining equipment currently remain "very, very low." The question is how long will this continue. Joy's backlog value already dropped a massive 42% for the year ended Oct. 31, 2013. If orders don't pick up from here, Joy's top line could shrink substantially. But mining companies continue to remain cautious. Arch Coal even plans to cut capex further by another $100 million this year after spending only $237 million last year.
I'd be looking for the sequential movement in Joy's orders in its upcoming earnings report, since that could be a good indicator of whether the mining market is turning around or digging itself a deeper hole.
Look for key strategies
Not surprisingly, analysts expect Joy's first-quarter earnings per share to be nearly half of last year's results. While the company started cutting costs aggressively last year, they haven't been enough to offset the low sales volumes. The first quarter also included several holidays, which means even lower sales even as costs remain the same. That could hurt Joy's Q1 profits substantially.
I'm expecting Joy to announce further cost-cutting initiatives for 2014 in its upcoming earnings call. Most of Caterpillar's restructuring efforts last year were directed toward its mining-equipment business, and will continue to be so this year. It expects its restructuring costs to more than double in 2014, which clearly means that it has planned some major business overhaul in a desperate bid to maintain margins. Investors can expect something similar from Joy Global, so keep an eye on those details this week.
The worst is probably over
A lower guidance for 2014 is the last thing Joy Global investors would want to see. During its last earnings release, Joy projected 2014 revenue to range between $3.6 billion and $3.8 billion and adjusted earnings to fall anywhere between $3.00 and $3.50 per share. For perspective, the company generated $5 billion in revenue and earned $5.83 a share in 2013.
Yes, that's a huge drop, and it looks like Joy has already factored in the worst while guiding into 2014. So perhaps investors will be saved another shock of a reduced outlook this week. But that may not be enough to boost the shares since the market is hoping for some good news and signs of a turnaround. Whether it's time to call the bottom on Joy Global stock will only be known this Thursday, but the worst may already be over.