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I believe the coal market will improve with the passage of time. Also, I believe Peabody Energy Corp. (NYSE:BTU) is the best stock to play the coal rebound, as BTU has superior margins, attractive valuations and higher return on assets of 4.4% in contrast to its peers.

As I have discussed in my earlier articles, I believe that the U.S coal market will improve in the near future as natural gas prices will rise and due to better coal supply management.

Natural gas prices are currently at $3.45 mmBtu and according to Energy Information Administration (EIA) forecasts, natural gas prices are expected to rise above $4 going forward. As the natural gas prices will rise, coal will become more cost competitive and coal fired electricity generation will rise. According to EIA estimates coal fired electricity generation is expected to grow to 39.1% in 2014, as compared to 37.6% in 2012. The following chart shows the historical and projected U.S. electricity generation by fuels.
(click to enlarge)
Source: eia.gov

Also, the U.S. coal producers are reducing their coal supply to improve coal prices. Coal production in the U.S. fell by 6.9% in 2012, and it is further expected to decline by an additional 1.2% in the current year, 2013. The following chart of monthly coal production shows that coal production has been declining continuously since last quarter of 2012.
(click to enlarge)
Source: eia.gov

A look into four Coal Stocks

Fourth quarter 2012 proved to be better than expected for BTU, Alpha Natural Resources, Inc. (NYSE:ANR), CONSOL Energy Inc. (NYSE:CNX) and Arch Coal Inc. (NYSE:ACI). Each of these four companies were able to beat the analysts' earnings consensus for 4Q'12. Other than ACI all three companies registered better than expected revenue for the quarter. Following table shows earnings and revenue beat of these companies for 4Q'12.

4Q'12 Actual EPS ($)

4Q'12 EPS est. ($)

Earnings Surprise %

Revenue Beat %

BTU

0.36

0.25

44%

4%

ANR

(0.19)

(0.55)

65%

3%

CNX

0.43

0.24

80%

6.5%

ACI

(0.14)

(0.15)

6.7%

(3%)

Source: Yahoo Finance

Moreover, analysts are also anticipating earnings growth for these four companies. The following table shows EPS forecast from 2013 through 2016.

2013

2014

2015

2016

BTU

$0.58

$2.01

$2.50

$5.45

ANR

($2.21)

($1.27)

($1.09)

$0.5

CNX

$1.07

$2.27

$2.45

$3.83

ACI

($1.0)

($0.33)

($0.02)

1.30

Source: Nasdaq.com

Conclusion

BTU

ANR

CNX

ACI

Average

Market Cap.

$5.7 billion

$1.8 billion

$7.18 billion

$1.15 billion

-

Forward P/E (based on 2016 EPS est.)*

4x

16.2x

8x

4.5x

8x

Gross Margin

27%

18%

29%

17%

22%

Operating Margin

14%

-

7%

4%

8%

ROA

4.4%

0.01%

1.7%

1%

1.8%

Source: Yahoo Finance
(* Note: I used 2016 EPS estimates for Price to Earnings calculation because all four stock respectively have positive earnings est. only in 2016)

As the coal market will improve in the future; I believe BTU is the best stock to play the coal rebound. BTU has the cheapest forward P/E of 4x among its peers and has higher margins and ROA in comparison to the industry average.

Source: The Return Of King Coal And The Coal Stock To Play The Rebound