Trade Update Dec 20th, 2012 at 10:04am: With JOY straddling the 62.5 strike, and one day until expiration, the calendar is worth more than a double from what I paid last week prior to its Q4 earnings. I thought it was a good time to take the trade off and book the profit and avoid a large move one way or the other that has the potential to erode the profit.
Action: Sold to Close JOY ($62.45) Dec/Jan 62.50 Call Calendar at 1.85 for a .97 gain.
Original Post Dec 6th, 2012:
Event: JOY reports fiscal Q4 earnings prior to the open tomorrow, the options market is implying about a 5.75% move, vs the 4 qtr avg move of about the same at 6%.
Sentiment: Wall Street analysts remain fairly positive on the stock, despite its poor ytd price performance, with 16 Buys, 6 Holds and 1 Sell and an avg 12 month price target of about $71. Short interest remains fairly high at about 6% of the float.
Price Action: JOY is down about 22% ytd and down 40% from the 52 week highs made in Feb , vs a slightly similar U.S. industrial company CAT that is only down about 3% ytd and the XLI (of which is JOY is a member) that is up 13.5% in line with the SPX.
Technicals: The chart sets up in a pretty interesting fashion in a market that has been rotating out of ytd winners and into some ytd losers. On the downside, $50 should most certainly serve as near-term support, while the 200 day moving avg of about $61.68 seems to be a near certainty on the least bit of good news.[caption id="attachment_20436" align="aligncenter" width="490" caption="JOY 1 YR chart from Bloomberg"][/caption]
Valuation: This is the strongest bullish argument. The P/E is near all-time lows in the stock, around 8.5x, which implies that the market expects negative earnings over the next couple years. Here is the 5 year chart of the P/E:
Analysts have modeled in flat earnings for 2013 and 2014, so expectations are quite low. If the company is able to achieve flat earnings for the next 2 years, that would be considered a win with the stock at current levels. The bull case will fall apart if earnings contraction looks like the more likely scenario.
Implied Vol Snapshot: 30 day at the money implied vol is in the low 40s, which is slightly above the 30 day realized vol of about 39.5 and the 90 day realized of 40.5. The weekly at the money strikes are in the low 80s. Implieds will likely come in to the high 30s after the report which would be inline with the lows of 2012.[caption id="attachment_20442" align="aligncenter" width="490" caption="JOY 30 day IV vs 30 and 90 day Realized IV from Bloomberg"][/caption]
My View: Back in August, prior to their last earnings report we took a look at the name and I had the following to say:
recent data points relating to coal and iron ore demanded have clearly affected sentiment towards the mining stocks and the equipment suppliers. Those like JOY heavily exposed to coal are grappling with increasing interest in natural gas domestically and lagging electricity demand from emerging markets like China.
With recent remarks from the likes of BHP and VALE regarding capex cuts, it is hard to make a bullish near term argument, especially as the street still expects 2012 eps to come in 20% above 2011, and sales up 25%.
There appears to be some risk to full year guidance. That said if earnings and guidance are not as bad as expected the stock could see a fairly healthy bounce
The contrarian in me would rather play for the TIF sort of bounce as opposed to pressing the name through previous 52 week lows, it won’t take much to get this stock going to the upside, as expectations appear to be fairly low heading into the print.
I would have to say that my current feelings are quite similar, especially when you consider some of the slightly better than expected economic data out of China. The company gets about 50% of their sales outside the U.S., so the least bit of good news from emerging markets could help to catalyse the sort of move we have seen in the last few months from the likes of CMI, up 30% from 52 week lows & CAT up 12.5% from the 52 week lows.
JOY is not a company that I know well, and I cant tell you that I have a ton of conviction that the stock won’t implode on bad earnings news, but the slight bit of better than expected news and I am fairly sure the stock will rally, I like the contrarian set up.
MY TRADE: JOY ($57.90) Bought the Dec22nd / Jan13 62.5 Call Calendar for .88
-Sold 1 JOY Dec22nd 62.50 call at .51
-Bought 1 JOY Jan13 62.50 call for 1.39
Break-Even on Dec22nd Expiration:
-Stock near or higher than 62.50 make difference btwn the Dec and Jan.
-Stock below 62.50, the Dec Expires worthless and I own the Jan 62.5 call for .88, that is my max risk. At which point I will look to spread and further reduce my break-even for Jan expiration.
-If stock breaks down, the Dec will be near worthless, but the Jan will hold some value.
CONVICTION: AS WITH ANY TRADE THAT LACKS FIST POUNDING CONVICTION, I AM PLAYING THIS SMALL, BUT I LIKE THE CONTRARIAN SET UP IN A MARKET THAT APPEARS TO BE LOOKING FOR LAGGARDS.