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If you click on this article, you probably believe in coal's future, and so I do not need to tell you about coal. But there is a coal stock that I believe has good upside.

Cloud Peak Energy (NYSE:CLD) is a coal miner that is newly spun off from Rio Tinto (RTP). Rio was cash strapped because it took on too much debt to buy Alcan; and so it recently spun off CLD to raise cash. After the spinof, Rio still holds about 49% of CLD. Currently, CLD is trading at 7 x PE and under 5 x EV/EBITDA. Most other coal miners trade at 16 x forward PE and 9 x EV/EBITDA. CLD's mines are in the extremly low production cost region of Powder River Basin. Further, its coal is low in sulphur and therefore less harmful to the environment than coals from competitors. Therefore, CLD deserves higher multiples compared to peers. CLD's margin was unusually high last year, probably because Rio was dressing it up for a sale. But after normalizing the margin (5% net margin vs 18% for trailing 9 months), and using a 16 x industry average PE, CLD is worth $19. And using some conservative EBITDA numbers ($300 million annual vs. pro forma $309 million for trailing 9 months), and a 8 x EV/EBITDA, CLD is worth $25.

Since its spinoff last month, CLD has received rather cold reception. The stock IPO'ed at $15, below the estimated range of $16 and $18; and it trades near $13 now. The stock is not widely followed and is not a member of any indexes that I am aware of. However, now that CLD is spun off of Rio Tinto, it is the 3rd largest coal miner in the U.S.. So I expect it to be added to coal and other energy indexes in the not-too-distant future. Once indexes add CLD, funds that are based on these indexes will add the stock to their holdings. And given the rather light float CLD has (306 million shares), the stock can start moving upward once funds start buying.



Disclosure: Long CLD, BTU

Source: How About a Coal Stock for Your Stocking?