Restarting James River, a Smaller and Cheaper Coal Company

James River Coal (JRCC) is smaller than the "headline" coal stocks but is among the cheapest with a very surprising earnings report at the beginning of the month. In one of the worst trades of the year, I closed out JRCC from the portfolio March 17th before "reflation" was cool at $11. [Mar 17: Bookkeeping - Closing James River Coal] The chart stunk as the stock was below all key moving averages...

(THEN)


Now however, the story is completely different as the stock is above all key moving averages.

(NOW)


And I missed a good 100% run. Within a few days of when I sold, the stock jumped back over the 50 day moving average - then went sideways as the overall market screamed higher (which to me is "bearish"), but then the earnings report seemed to surprise all observers. As always, technical analysis and price action is just a tool, not an all-knowing provider of outcomes. In this case there was nothing in particular to let us know from $14s to $22s would happen within a handful of sessions.

We've been noting how coal is "hot" of late [May 20: Market Vectors Coal (KOL) Red Hot], and frankly JRCC is still dirt cheap compared to peers and always a candidate for a buyout offer. What I like about this technical set up is we are just above multiple support and if the thesis of the day turns away from "reflation" to whatever the next thesis is, we can cut back with a very defined spot.

I started a 1.9% stake here in the upper $20 range. Comparing earnings estimates is fraught with danger among coal companies because some rely on thermal coal, some metallurgical, some are heavily exposed to the spot market, and others have a lot of longer term contracts, but JRCC is generally expected to print over $3 in earnings both in 09 and 10.

Larger peers are generally trading (I am looking out to 2010 since 2009 estimates are in flux) at about 11-12x 2010 estimates; obviously you can do the simple math and see if JRCC were valued the same it would be >50% upside. Being a smaller player, I don't expect that gap to fill completely, but if the variance closes there could be an opportunity there.

That said, as any reader of mine knows - when people yell fire and all commodities sell off none of this analytic talk will matter - the student body will run right, and all stocks in the commodity space will be sold off in the same direction. But I still like to pretend individual company metrics mean something rather than the only thing that matters is program trading by computers.

A quick look at earnings that helped set the stock off (along with the recent love of all things commodities)

• (May 1) James River Coal Co's (JRCC) quarterly profit beat expectations, boosted by a 73 percent jump in the average price of Central Appalachian coal (CAPP), but said it would cut production due to the softness in coal demand. The results pushed James River's shares up 26 percent.
• CAPP average sales price rose to $90.91 per ton, compared with $52.56 per ton in the year-ago quarter, driven by new contracts signed by the company in 2008.
• Revenue at the Richmond, Virginia-based coal producer rose 39 percent to $192.1 million.
• In a conference call with analysts a company executive said James River cut production on Saturdays, stopped purchase of coal and idled most of its contract mines. It also plans to reduce capital expenditure as part of its cost-savings.
• For 2009, the company has about 6.7 million tons of coal priced at $89 per ton. It lowered the price of a 700,000 ton contract to $70 from $108 and will re-adjust the amount for supplies in 2010-12. "The company... essentially gave up a little value on its 2009 contracts in order to get more value in 2010-2012. This is a strategy that we think makes a lot of sense for the company," said analyst Jeremy Sussman of Natixis Bleichroeder.
• "This should help discount any theory that James River is just a 'one-year wonder'," the analyst added, referring to the company's contract position for 2009 and 2010.
• James River Coal, which operates in the Central Appalachian basin of the United States, mines and sells bituminous, steam and industrial-grade coal in Kentucky and Indiana.

Disclosure: Long James River Coal in fund; no personal position