Coal's Dark Days Are Over

Much like a skipjack, a triggering mechanism that causes mine cars to dump loads of coal in a mine, traders have been dumping coal stocks since peaking in July.  However, the fundamentals of the industry are still intact and coal stocks are likely to provide huge investment returns over the next 3 to 5 years. 

Yesterday, Peabody Energy (BTU) announced earnings that absolutely shocked the Street, beating the consensus on EPS and Revenues easily, and raising guidance for the year.  When a major industry leader provides such a bright outlook, it is likely that the bottom in the industry has occurred.  The most important statement to come out of the earnings announcement was that “the easing of demand growth is likely to be offset by diminished global coal supply”.  Demand is the key driver for coal stocks and worries about slowdowns in china have led investors to oversell all of the coal stocks.  However, emerging markets such as Russia, South Africa, and Indonesia are seeing robust demand for coal. 

Pricing is strong and as seen below the US coal production rates are still near all time highs, and it is likely that China’s insatiable demand for coal picks up in the near future.  Although there is a slowdown in steel production, which coal is a major raw material for, due to the slowdown in housing and auto markets, coal will pick up the slack in electricity generation, especially in the emerging markets.  Coal is also a cleaner fuel and is expected to become a larger player in energy. 

Putting the macro-analysis aside, the individual stocks are trading at extremely low valuation metrics.  The table below highlights some of the more significant fundamental data from the most tradable coal stocks.  On simply a fundamental basis, Arch Coal (ACI) is the standout with a low multiple, high growth, sustainable leverage, and one of the most efficient operations of the group.  Alpha Natural (ANR) also looks solid, and could see significant price appreciation despite being in the middle of a takeover offer gone wrong. 

Looking at the technical analysis Consol Energy (CNX) looks like an oversold stock that is ripe for the picking, currently sitting at a triple bottom going back to 2005.  There has been huge selling volume recently likely due to margin calls and hedge fund redemptions, because hedge funds were overly exposed to commodity stocks. 

Disclosure: No position in any stocks or ETFs mentioned.

Comments

[Dellmsft:]

Agree with the article but not sure about the statement that "Coal is also a cleaner fuel". Cleaner than what?

2008 Oct 17 08:46 AM

[Andy Singh:]

Great analysis. Do you think buying the KOL etf is a better play than specific stocks?

2008 Oct 17 10:03 AM

[Joe Kunkle:]

Sorry about that...I meant to say that new clean coal technologies are improving

2008 Oct 17 10:21 AM

[Ferdinand E...:]

You say that clean coal technologies are improving - I certainly hope so, because everything considered, they don't have much to offer yet. However, regardless, a lot more coal is going to be used than many observers think.

2008 Oct 17 11:27 AM

[fran:]

i agree with F. Banks comments on coal. for longer than most think/hope, oil, nat gas, and coal will remain the energy staples for the economic world. ALTs in their various forms will be victims of capacity, money, time. environmental improvement through conservation and forms of user/provider efficiency are the most likely leverage points for our new economic paradigm.

2008 Oct 17 02:19 PM

[einstein p ...:]

I don't really understand why the earnings from BTU was such a surprise. Coal is primarily used for electricity. People are spending more time at home --- watching television, playing video games on computers. There are also more people working from home. I seriously doubt they are doing it in the dark.

China is going to have to come back to market sooner or later and they are dependent on coal for electricity.

From what I heard during the conference call, the credit crunch impaired the ability of several coal companies, which means there will be less coal and price support. It could also create consolidation in the group.

I've been buying ACI, BTU, and WLT.

2008 Oct 17 02:29 PM

[blahhh:]

i bought pcx at almost the peak and i am currently bleeding now. hopefully THIS IS THE BOTTOM. if pcx hits single digits - it will probably be the scariest moment of my life...

2008 Oct 17 11:42 PM

[old guy:]

This week I am back in ACI and CSX to transport it! Took profit in both awhile back.

2008 Oct 18 05:32 AM

[epeon:]

I have been a longtime believer in coal for a variety of reasons. Coal is not, currently, a particularly clean form of energy. It could be, we have good coal gasification technolgy, for example, but most plants are based upon it.

As far as individual companies, I like ARLP and AHGP. Mainly because these companies pay a significant dividend. I don't know when these companies will get the price multiple they deserve. However, both ARLP and AHGP pay me a signifcant dividend while I wait.

2008 Oct 21 08:19 AM

[epeon:]

I meant to say, most plants are not based upon coal gassification. sorry about the typo.

2008 Oct 21 08:20 AM

[blahhh:]

WHAT IS HAPPENING TODAY?!?!?!?!?

2008 Oct 22 10:56 AM

[Olufemi:]

Check out PHC.t on the toronto exchange.
Producer and developer in the Illinois basic
Went public just before the major coal sell-off, is now trading at 50% of their cash value.
They did a 100 million dollar financing in June to bring two new mines into operation by 2010.
thank me in 2 years

2008 Oct 25 04:06 PM

[10Q Detective:]

A big concern As illustrated by Foundation Coal, when the mining companies are shutting-in production--Can they hold production costs down in an environment where volumes are declining?

industry.bnet.com/ener.../

Your thoughts?

My Best,

David J Phillips – Editor, 10Q Detective
Contributing Energy Analyst
CBS/CNET

2008 Nov 01 02:42 AM

[chistletoe:]

You forgot to mention Patriot Coal, PCX,
the appalachian spin-off from Peabody,
which is now down to a price of around 14
after reaching highs of (adjusting for the split) above 80 ....
next year's earnings are still estimated at above $5/share,
this is an unbelievable opportunity for sharp investors ....

2008 Oct 17 05:06 AM