Overview

SP-500 constituent Joy Global (JOY), an underground and surface mining equipment manufacturer reports Thursday before the Opening Bell. As a worldwide player in the farm and construction machinery market, the outfit’s results and outlook could impact related peers like Caterpillar (CAT) and Deere (DE), which are pulled along by a similar-looking bulldozer.

Of notice in front of its report, shares of Joy Global and its constituents have been laggards relative to the SP-500 with ups and mostly downs of late tied to weakened investor sentiment regarding global economic growth. Directly in front of tomorrow’s earnings release, shares were under pressure as Chinese officials dashed prior bullish hints of development stimulus projects in the works to boost its economy and manufacture a softer landing.  

Analyst opinion on Joy Global is fairly bullish with room for downgrades and / or price target revisions to the downside. According to Yahoo Finance, of the 16 brokers covering Joy Global, the mean recommendation on a scale of 1.0 – 5.0 is 2.1. A 1.0 level is associated with a “Strong Buy” and 5.0 with “Sell.” JOY's median price target is 98, with a high estimate of 114 and a low estimate of 74. At the same time and why we suggested there's room for bearish cuts, shares of JOY closed at 59.

The Number

Joy Global is expected to pull in earnings of $1.97 per share compared to the prior year’s $1.52 for an improvement of about 30%. Sales are expected to grow by 60% from $896M to $1.43B.

Figure 1: Joy Global (JOY) Past Top & Bottom Line Data

Trader Reaction

In FY12Q1 Joy Global came in just shy on both its top and bottom lines, but raised FY12 EPS to in-line with Street views and issued upside, above-views revenues to reflect a recent acquisition. Shares finished lower by 5.25% in an engulfing-style bearish candlestick after opening modestly higher.

For its fourth quarter, the company announced a modest profit beat of three cents, “just shy” revenues and issued in-line EPS and sales guidance for its FY12. JOYG finished down about 10.75% after gapping lower by about 5% and trending lower to finish near session lows.

Going back to last year's third quarter, Joy Global topped profit views by $0.07 but came in slightly below Street sales estimates while issuing a mixed outlook of with fiscal year earnings projected to top views and revenues to fall below estimates. Traders opened shares higher by roughly 5% and pushed JOYG slightly higher before reversing into profit-taking mode with JOYG finishing up a scant 1.1%.

And one year ago, the company blasted earnings estimates by $0.17 on slightly better-than-expected sales growth of 18.6% while raising both its FY11 EPS and revenue forecast above consensus views. Bulls reacted by sending shares up about 2.5% at the open, then rallying to a gain of 5.17% on the day.

The Chart

Figure 2: Joy Global (JOY) Weekly Chart

For traders looking to the technical tea leaves for clues, in our opinion the weekly chart is setting shares of JOY up (or down) for a fairly decent reaction to tomorrow’s report. For the bulls, shares have been consolidating for the past three weeks near JOY’s October lows while testing its 200-Week SMA and 50% retracement from its March 2009 lows for support as the RSI hits an oversold reading. An EW5 completion on the daily also provides confirmation for a potential major low.

For the bears, one trader’s double bottom can at times look like a substantial inverted cup or upside down “W.” As this pattern follows two lower highs from April of 2011 and an uptrend line breakdown, there’s evidence enough that mining efforts could reach deeper with a price target of $48 to $50 and levels currently well-removed from a Street potentially caught off guard and in need of more bearish revisions to estimates.

Option Activity

In Wednesday’s session, puts outpaced calls by a margin of 1.20-to-1.0 on overall volume of nearly 35,000 contracts and topping past peaks of about 25,000 over the past 17 months. That said, the slight skew in favor of puts is actually a weak relative reading judging by the put/call ratio chart shown in Figure 3 and one which has seen aggressive put activity over the past month.

Figure 3: Joy Global (JOY) Put / Call Ratio

Unearthing the option board at Joy Global, concentrated option volume could be found in the near-the-money Weeklys June 60 put with 3,600 matching its open interest. Not too far behind, the Weeklys June 55 put saw volume of 2,900 trade compared to 775 contracts. The strike positioning and levels of activity suggest either rolling down put positions or perhaps a long bear put spread may have been a popular strategy to reduce risk.

With the Weeklys expiring Friday and implieds near 115%, bell curve analysis suggests traders are pricing in a 68% chance shares of JOY will remain within 8.5% of tonight’s close at 59 for the next two trading days. The consensus pricing of sorts is somewhat high in relation to past earnings events as three of the last four reactions were well below today’s estimate on a close-to-close basis. That said, given the important technical placement of shares in front of tomorrow’s report; bears “maybe” spied either rolling or going vertical are making better “cents” and maybe dollars too of Joy Global.   

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.