We are downgrading Joy Global Inc. (JOYG) shares to Neutral from Outperform, reflecting forecast of limited revenue upside in 2010. The company reported EPS of $0.73 per share, topping the Zacks Consensus Estimate of $0.64, primarily driven by an improved commodities market and better orders during the quarter.

While new order bookings in the first quarter improved 22%, revenues declined 3% year-over-year to $729 million, driven by a 12% decline in the Underground Mining Machinery (UMM) segment, offset by an 8% increase in the Surface Mining Equipment (SME) segment.

Steel and other industrial producers in the industrialized countries made significant reduction in inventories in 2009, and days of supply were reduced to historical averages on lower volumes. However, the steel industry has shown signs of recovery from the second half of 2009, which has resulted in improved demand for mined commodities.

In addition, the demand for coal has picked up in the recent quarter, driven by increased demand for seaborne coal in the emerging markets, primarily China and India, and significant improvement in the U.S. thermal coal market due to increased power demand.

The fundamentals in the commodity markets are improving as increasing demand from the industrialized countries adds to high demand from the emerging markets.

Joy Global continues to see a positive outlook for the commodities that its customers mine. Encouraged by the improving fundamentals in the commodity markets and the ongoing work with customers, management expects the expansion projects will move to equipment orders during 2010.

The company expects the strongest equipment demand will come from copper, international coal and iron ore, and that orders will come predominately from North and South America, Asia and Africa.

Furthermore, the company expects any upside to orders to be mostly in original equipment, and longer lead times will push their subsequent shipment into 2011 in most cases. Thus, we believe the benefits of improved equipment orders will be accretive to the company’s revenues in 2011.

As a result, management reiterated its fiscal 2010 revenue guidance of $2.8 billion to $3.0 billion, but increased its EPS guidance range by 20 cents to $2.85-$3.05.

Zacks Investment Research

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