Massey Energy: Opportunity or Value Trap?

| About: Alpha Appalachia (MEE)

Shares of Massey Energy (NYSE:MEE) dropped another 7% Wednesday to end the day at $45.22. Massey has fallen almost $10 per share since the explosion in its Upper Big Branch mine in West Virginia this past Monday.

Analysts are recommending buying shares based on the recent drop off. The stock is trading at its lowest level since March 2nd. Shares appear cheap trading at 16 times 2010 earnings estimates of $2.78 and 9 times 2011’s earnings of $5.02. So, should you buy Massey Energy at its current price?

Anyone buying Massey’s shares is speculating because you just don’t know how this situation will play out. I don’t see how analysts and investors can have any confidence in Massey’s earnings for the foreseeable future. It’s hard to put much stock into the 2011 earnings estimate of $5.02 per share.

Here are three reasons to avoid investing in Massey Energy.

  1. Massey Energy will now be under a microscope with the company likely facing increased regulation from the federal government and the state. Increased regulations on mining operations will lead to increased production costs. These production costs will cut right into the company’s profitability. Mines will have to be brought up to code and miners will need to get better equipment and better safety training.

  2. Massey Energy appears to have been failed by its leadership. An important part of value investing is trusting a company’s management team. Investors cannot have any confidence in Chairman & CEO Don Blankenship’s leadership. He has placed the company in the hot seat by overlooking over 450 mining violations at the Upper Big Branch mine since 2009. Blankenship has a history of disregarding worker safety and Blankenship should be held accountable for the company’s lax procedures.

  3. Massey Energy will now likely face unionization and a number of civil lawsuits. Labor unions are good for the employees because it will improve working conditions and benefits. Labor unions will also increase wages and operating costs for Massey. If the mining giant is found negligent in wrongful death lawsuits, the company’s earnings will take a big hit.

Blankenship has no one else to blame for its current situation but himself. If the CEO had taken care of the repeated violations, than the firm’s image would not be so tarnished today. Until there is greater clarity into the extent of Massey Energy’s culpability; it’s difficult to tell if shares are a value or a value trap.