Seeking Alpha
Large-cap, mega-cap, telecom, long/short equity
Profile| Send Message|
( followers)  

Similar to my position in previous articles, I reiterate my bullish stance on U.S. coal stocks. I believe U.S. coal stocks have bottomed out and the worst has already been priced in. Improved coal supply management, a rise in natural gas prices and strong U.S. coal exports will bode well for the U.S. coal industry. The following table shows the market capitalization lost by several U.S. coal stocks since 2011.

Market Value Lost since January 2011

Peabody Energy (BTU)

74%

Arch Coal (ACI)

87%

Alpha Natural Resources (ANR)

90%

Walter Energy (WLT)

90%

James River Coal Company (JRCC)

92%

Coal ETF (KOL)

61%

Source: Googlefinance.com

Natural gas prices bottomed in April 2012 to below $2 mmBtu. Due to lower natural gas prices, natural gas-fired electricity generation increased and coal-fired electricity generation decreased, which led to excess coal supply in the market. Currently, natural gas prices are $3.64 mmBtu; the Energy Information Administration [EIA] forecasts natural gas prices to rise above $4 mmBtu in 2H2013 and to reach almost $4.50 mmBtu by the end of 2014. As natural gas prices rise, coal will become more cost competitive, and coal-fired electricity generation will rise, which will bode well for coal markets. The EIA anticipates coal-fired electricity generation to increase to almost 40.5% in 2013 and 2014, as compared to 37% in 2012. The charts below show the EIA's forecasts for the rise in natural gas prices and the increase in coal-fired electricity generation.
(click to enlarge)
Source: eia.gov

Another important factor for a recovery in coal markets remains coal production cuts. To address the problem of excess coal supply in the markets, U.S. coal companies are lowering their production. ACI and ANR are among the leading coal companies that have announced that they will lower their coal production in reply to weak coal prices. As excess coal supply is removed from the markets, coal prices will improve, which will strengthen the top line results of coal companies.

Increasing U.S. coal exports is also an important performance driver for the U.S. coal industry, which will improve weak coal markets. According to a recent quarterly report on coal published by the EIA, U.S. coal exports were up almost 14% in 1Q2013; the highest for the U.S. since 2008. U.S. coal exports are likely to improve in the future, as the Eurozone looks to overcome the prevalent economic crisis. The EIA has projected U.S. coal exports to total 114 mmst and 107.5 mmst in 2013 and 2014, respectively. The graph below shows the strong U.S. coal exports.
(click to enlarge)
Source: eia.gov

A Look into five U.S. Coal Stocks
The recent second quarter was better than what had been expected for U.S. coal companies. BTU, ACI, WLT and JRCC were able to register earning beats for the recent second quarter, while ANR's earnings were in line with analyst estimates. The better-than-expected bottom line results registered by the companies for the recent second quarter were mainly driven by their cost control efforts. The table below shows the earning beats registered by the companies.

2Q 2013 Actual EPS ($)

2Q 2013 ESP est.
($)

Earnings Surprise (%)

BTU

0.33

(0.05)

760%

ACI

(0.29)

(0.33)

12%

ANR

(0.59)

(0.59)

0%

WLT

(0.55)

(0.77)

29%

JRCC

(1.04)

(1.33)

22%

Source: Yahoo Finance

I believe coal stocks have bottomed, and the only direction to go from here is up. Analysts are also projecting earnings for coal companies to improve in the coming years. The table shows the earnings per share forecasts for BTU, ACI, ANR, WLT and JRCC from 2013 up till 2016.

2013

2014

2015

2016

BTU

$0.13

$0.68

$1.68

$4.4

ACI

($1.25)

($1.03)

$0.33

$0.80

ANR

($2.53)

($2.21)

($1.53)

($1.39)

WLT

($2.98)

($1.34)

$1.04

-

JRCC

($4.63)

($4.05)

($2.61)

-

Source: Nasdaq.com

Conclusion
I believe that as coal markets strengthen in the future, BTU remains the best coal stock to play the rebound in the U.S. coal industry. BTU has an attractive forward P/E of 3.90x, as compared to ACI and WLT, who have forward P/Es of 5.60x and 10x, respectively. Moreover, BTU has a higher gross margin of 22% in contrast to its peers' averages of 16%. Furthermore, BTU has lower debt-to-equity of 130% in comparison to its peers' averages of 170%.

Market Capitalization

Forward P/E based on 2016 EPS forecast

Gross Margin

Debt to Equity

BTU

$4.60 Billion

3.90x

22%

130%

ACI

$948 million

5.60x

16%

190%

ANR

$1.34 billion

-

17%

70%

WLT

$810 million

10x

17%

290%

JRCC

$74 million

-

6%

165%

Average

-

6.5x

16%

170%

Source: Yahoo Finance

Following are links to my other recent articles on the individual companies mentioned above:
- BTU
- ACI
- ANR
- WLT

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