Why This Stock Could Move Big Over the Next Four Days

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Joy Global (NYSE: JOY) was inching up nicely in January when rival Caterpillar (NYSE: CAT) suddenly barged in with a bleak outlook. The joy balloon burst instantly, and the stock is nearly 9% away (as of this writing) from the high it hit around Jan.18. It wasn’t about Caterpillar’s upcoming numbers though; it was something more serious, something that could hit Joy hard as well. And this is also what analysts and investors would want Joy to assure them in its upcoming earnings call on Feb. 27 – that there’s no problem with its recent China-based acquisition. But, there’s something even bigger than this that the market would want Joy to opine on next week.

What to look for

Caterpillar took a monstrous hit of over half a billion dollars in its last quarter as it unearthed an accounting fraud at its recently acquired China-based company ERA Mining Machinery. As much as the news shook Caterpillar investors, it also brought Joy under the scanner as it also has a not-too-old Chinese acquisition under its belt. Yet, Joy has been quick enough to dispel fears, saying that it hasn’t come across any untoward instances in China yet. That might sound good, but investors would certainly like to know how IMM is expected to fare in the year ahead, and whether its integration is on track. After all, Joy had paid a premium to acquire IMM at a time when mining was just entering its low phase in China.

Even otherwise, if Joy doesn’t present good first-quarter numbers, or caps off with a tepid outlook, you can blame China for it. It is one of the most important markets for mining companies, and unless it rebounds, there’s not much hope. In these uncertain times, Joy is focusing on restructuring and downsizing to maintain margins even as top line growth is hard to come by. One of its plans includes shifting some operations from high-cost market Australia to China during the latter half of 2013. That’s just as much Joy revealed in its last earnings call. I’ll be looking for further details in the upcoming one.

Wait for orders

Caterpillar slowed down production in its last quarter, reducing inventory by $2 billion, nearly double of what it had originally planned to. Caterpillar’s revenue for the quarter was down 7%, and it has a pretty mute outlook for the full year. Analysts are expecting Joy to report 5% lower revenue for the first quarter.

But an investor needs to understand that the more important measure for Joy would be the pace of order inflow, and not revenue. Say, for 2013, Joy’s top line might still look healthy even if there aren’t many new orders. That’s because the company doesn’t deliver as soon as it books. Caterpillar’s last-quarters numbers are a perfect example. Sales for its Resource Industries’ (mining) business was up 14% from the year-ago quarter, but new orders didn’t match up to last year’s levels.

Joy already has enough orders in hand carried over from earlier year(s) that will take care of 75% of its total projected 2013 production. So the real test for Joy, and the mining industry as a whole, would be to see how many new projects are flagged off by mining majors this year. Frankly, I am not expecting much. Consider the case with top two miners, Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP).

No joy in their words

Rio Tinto considers 2012 to be its "peak year of investment" when it approved $16 billion of CapEx. For this year, it expects $13 billion. That figure might inch up if Rio gets some funding partners, but nothing more shall go out of its own pockets. In fact, Rio is on a major cost-reduction spree. After slashing $2 billion last year, it is targeting another $2 billion this year. Rio even deferred some capacity expansion projects last quarter, and will re-evaluate others this year. So if some projects are slowed down, or even cancelled, don’t be surprised.

BHP spent around $12 billion during the last half of 2012, but has set aside only $10 billion CapEx for the next six months. Like Rio, it reduced costs by nearly $2 billion during 2012. BHP foresees lower CapEx this year compared to last year, and has even ruled out approving new projects during the first half. Knocking off debt and boosting dividend are on its list, instead. Its 20 brownfield projects remain on schedule, but they won’t be operative before 2015.

These miners might report better CapEx numbers if 2013 surprises, but higher CapEx from them may not necessarily mean higher sales for equipment makers like Joy. Caterpillar explained it well. It foresees significant inventory reduction at dealers’ end this year, but they would be simply selling off existing stock to customers, and given the huge stockpiles, it is unlikely dealers will need to re-stock much.

Listen carefully

Simply put, prepare for a lukewarm outlook from Joy. That’s not something to look forward to. But yes, what Joy has to say about the recent rumors of a possible takeover is something everyone’s interested in. Traded volumes in the stock shot up recently on rumors. Many consider General Electric (NYSE: GE) a potential seeker as it recently forayed deeper into mining through two acquisitions and plans to double its mining revenue in some years. Not many know that Joy Global’s CEO, Michael Sutherlin, even responded positively to the idea of getting acquired. If anything turns up, it would be the biggest boost for Joy’s shares.

There’s anyway not much reason for a long-term investor to stay away from Joy. Coal prices are stabilizing, and China is working hard to stimulate growth. At a P/E of under 9 times, Joy is cheap. Stay tuned as I take you through its earnings release. Click here to add Joy Global to your stock watchlist. 

Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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