The gruelingly slow pace of the global economic recovery has been quite painful for many industries. But few have felt the impact more than heavy mining equipment operators. We’ve already seen Caterpillar (CAT) disappoint investors this earnings season, and leading competitor Joy Global (JOY) could be set to follow suit.
Click to Enlarge Joy Global is set to take the earnings stage ahead of the open Wednesday morning, with analysts expecting a drop to $1.38 per share from $1.82 per share in the year-ago period. Revenue, meanwhile, is seen falling 15% year-over-year to $1.18 billion.
Historically, Joy Global has topped the Street’s expectations in the past three quarters, but you’d be hard-pressed to tell from the stock’s nearly 20% decline year-to-date.
Expectations are not very high heading into tomorrow’s report. Currently, only 11 analysts following JOY rate the stock a “buy,” compared to 10 “holds” and no “sells.” However, the consensus price target of $66.50 rests 26% above the stock’s Tuesday close at $52.87.
Elsewhere, short sellers have loaded up on short JOY positions. During the most recent reporting period, the number of JOY shares sold short rose by more than 14% to roughly 18.6 million shares, or 17.6% of the stock’s total available float. While these short positions could create the potential for a short squeeze for JOY, the stock’s historical reaction to better-than-expected earnings suggests a very low likelihood.
Even short-term options traders are betting against JOY. In the front two months of options (including August weeklys set to expire at the end of this week), JOY has accumulated put open interest of 42,686 contracts compared to call open interest or 36,975 contracts. The result is a bearishly skewed put/call open interest ratio of 1.15 for the period. Given the proximity of Joy Global’s earnings release, this focus on puts instead of calls carries an even heavier bearish sentiment reading, since options traders tend to lean more heavily toward calls ahead of such events.
Drilling down on JOY’s options activity, we find that peak put open interest of 11,310 contracts resides at the out-of-the-money Sep 50 strike. Following at a distant second is the in-the-money Oct 55 strike, which sports open interest of 5,583 contracts.
On the call side, the out-of-the-money Sep 55 strike is tops with open interest of 5,111 contracts. Other notable call strikes include the Sep 52.50 strike, with 3,987 contracts, and the Oct 57.50 strike, with 2,747 contracts.
Overall, August weekly implieds are pricing in a post-earnings move of about 5.6% for JOY, placing the upper bound near $55.79 and the lower bound near $50.21.
Traders looking to position themselves ahead of tomorrow’s report might want to go with the flow on Joy Global’s sentiment backdrop. Bearish sentiment on an underperforming stock is par for the course, and does not offer up a contrarian read for JOY. As such, traders might want to consider a Sep 50/55 bear put spread ahead of the company’s quarterly report.
After the close of trading last night, this spread was offered at $2.53, or $253 per pair of contracts. Breakeven lies at $52.47, a decline of less than 1% from yesterday’s close, while a maximum profit of $2.47, or $247 per pair of contracts, is possible if JOY closes at or below $50 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.