Depressed Valuations For Alpha Natural Resources Offers An Attractive Opportunity

Jun.20.13 | About: Alpha Natural (ANRZQ)

Alpha Natural Resources (ANR) has delivered better than anticipated results due to improvement on the cost front in the most recent quarter. However, weak coal markets remain as a hurdle to a recovery in healthy financial performance for ANR. I believe coal markets will rebound as natural gas prices will tend to rise and due to better coal supply management. Hence, improvement in the coal market will bode well for the company and might offer attractive potential returns to investors as it is currently trading at depressed valuations (as discussed below).

Industry Analysis
The coal industry has been suffering from rising regulations, increase in renewable energy production and lower natural gas prices, due to which the U.S. coal stocks have lost significant amount of market capitalization in the recent past. The coal ETF (NYSEARCA:KOL) is down 21%, whereas ANR stock is down 34% in the last one year.

The drop in natural gas prices in the U.S. resulted in higher natural gas fired electricity generation that curbed the thermal coal demand. However, natural gas prices have bottomed out and it is being anticipated that coal fired electricity generation will increase as coal become cost competitive again. According to Energy Information Administration (NYSEMKT:EIA) projections coal fired electricity generation is likely to increase to 40% in 2013 and 2014 as compared to 37% in 2012. The coal companies in the U.S. are also working to control coal supply, which will help to reduce/eliminate excess coal supply. I believe the aforementioned factors will lead to coal market rebound as the worse is already priced in.

Financial Highlights
The U.S. second biggest coal producer, ANR, posted a loss of 47 cents for the 1Q 2013, narrower than the analysts' consensus of a loss of 57 cents. However, loss for the recent quarter was 20 cents higher than the corresponding period last year. A bottom line beat for the company was driven by increase in the price of coal mined in the Western U.S.

Total revenues for ANR dropped to $1.33 billion as compared to $1.93 billion, however exceeding the average analysts' estimate of $1.32 billion. The price of thermal coal averaged $9.74 per ton extracted in the Powder River Basin, which was approximately 7% higher year on year basis.

In the most recent quarter, 2014, ANR was able to mark 22.9 million tons of sales volume, representing a decrease of 3 million tons as compared to 4Q 2012. Also, revenue per ton was $2.5 less for the most recent quarter as compared to 4Q 2013. Given the weak coal markets, the company has been improving upon its cost structure that has lead ANR to register cost per ton of $43.5 as compared to analysts' consensus of $45.5 per ton. Improvement at the cost front resulted in a margin of $6.23 per ton which was approximately $2.3 higher than the analysts' consensus in the last quarter.

A look into future
ANR slightly raised its total shipment guidance range for year 2013 to 83-93 million tons as compared to its previous target of 81-92 million tons. Guidance for cost of sales for the Western operations was maintained at $10-$11 per ton, however due to cost control efforts ANR lowered its Eastern operations cost of sales to $69-$73 per ton as compared to prior range of $71-$75 per ton. Moreover, ANR is anticipating SGA expenses to be in range of $140-$160 million and interest expense of in a range of $230-$240 million for the ongoing year, 2013.

Analysts are predicting that the company is to experience a growth rate of approximately 6% on average for the next five years. The table below reflects the analysts EPS estimates for ANR, from 2013 through 2016.





EPS estimates





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The U.S. coal stocks are currently trading at depressed valuations given the weak coal demand and poor financial performance by the coal companies. ANR is currently trading at a price to sales (P/S) ratio of 0.2x and price to book (P/B) value of 0.26x, these valuations are lower than the company's historical P/S and P/B average of 1x and 1.7x respectively. As natural gas prices have bottomed out and EIA is forecasting coal prices and consumption to increase, I believe these factors will translate into important stock price catalysts and definitely impact the stock price of ANR in a positive way.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.