In honor of the NCAA March Madness tournament beginning later this week, The Matador Group’s The Wild Hog and Jefferson Starship decided that some healthy competition was fitting.
We have developed a bracket of energy sector stocks that we feel have solid growth prospects over the long term. The next step was comparing each of these stocks, with the winners moving on along the bracket. We decided to focus on mineral, metal, and oil exploration and refining companies.
We acknowledge that there are some major companies that have been left out (Halliburton (HAL), Devon Energy (DVN), etc.) and apologize for this.
The first round results are posted below. We will continue our analysis in the days to come, but any feedback regarding the companies in the second round match-up would certainly be welcome.
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Our first match-up in the coal division is between two companies that operate and mine mostly low-sulfur coal, which is used by electric companies. ACI and BTU both operate mines in the Western U.S.and Appalachian regions. However, BTU also has mines located in Australia.
Both BTU and ACI expect the strong demand to continue in the coal markets, led by domestic economic expansion and solid weather. However, BTU is making an effort to expand globally, including establishing a presence in China, India and Indonesia.
ACI notes that "the idling of the longwall at Mountain Laurel will have an impact on Arch's financial performance during the first quarter of 2011." While the company does expect to make up some of the losses here, the extent is unknown.
Overall, BTU is a more liquid company with a higher current ratio, total cash ratio, and has more working capital. Additionally, BTU has less debt and is well-positioned for the future. With a higher operating income to debt ratio and a lower debt to equity ratio, BTU should have no problem staying liquid for years to come. The lower dividend paid by BTU can be explained by a smaller payout ratio, as cash is being put to use for further exploration and development.
For the above-mentioned reasons, BTU takes it down.
Here we have two companies with recent developments that aren't exactly ideal for business. As we all know, one of MEE's mines collapsed last year. CNX just paid around $6 million in penalties due to violation of the Clean Water Act at six of its mines. It will also spend roughly $200 million in an attempt to stop toxic discharges into the Appalachian's waterways.
However, MEE has been accused of lying and destroying evidence related to last year's mine accident. Various lawsuits are still being brought up against the company, and with no way of knowing the outcome it will be difficult to estimate potential losses. With CNX, we financially understand the impact of the fines imposed by the EPA.
Comparing the ratios of the two companies, MEE appears to be more liquid, judging by the working capital and its current ratio. MEE has stronger debt and leverage ratios. Fundamental logic would allow us to conclude MEE is the stronger investment but I'm going to go with CNX on this one. The uncertain future regarding its management's handing of the blast has me spooked.
Imagine that this game came down to a last second shot, and CNX hits it for the win.
Our first match-up in the metals division puts CCJ v BHP. To begin, the panic selling associated with uranium companies has absolutely destroyed CCJ's stock price. Before the earthquake, CCJ was trading around $39. The price has dropped around 20% since then, with no conviction that the decline will slow anytime soon. As long as there are concerns of a meltdown in Japan, CCJ will be under severe pressure. Germany has enacted a three-month moratorium on nuclear expansion, pending an investigation into its own facilities.
In response to the Japanese incident, CCJ held a conference call Monday afternoon to assess its situation, claiming no loss in contracts had occurred. Cameco supported its designs and didn't anticipate any type of situation such as the one in Japan. Cameco did mention the slide in uranium prices over the past few weeks on low trading volume. This may have pushed the stock off its multi-year high.
Now to BHP, an international minerals company. While the comparison between CCJ and BHP is debatable, we thought it would be a good idea to compare the two since they are both involved in the minerals and metals industry.
When one compares fundamentals, the difference between the two is almost laughable. BHP has provided strong revenue growth for years, while CCJ's revenue has jumped around. With strong operating income to current liabilities and operating income to LT debt, BHP proves it liquidity is far superior to that of CCJ.
A strong capital position further demonstrates this point. BHP has been given permission to drill in the Gulf, another sign of positive growth potential. BHP pays a dividend of over 3% while CCJ is below 1%. With the nuclear situation in Japan hanging over the head of CCJ and countries beginning to think twice about nuclear expansion, one can only make the right choice and go with BHP.
Comparing these two metal and mining companies was somewhat of a challenge. Both pose a strong international presence, albeit in different parts of the world. Almost a third of revenue for FCX came from the U.S., while 18% came from Japan (a big question for 2011). Most of RIO's revenue came from China, North America, and Japan. FCX produced strong numbers in terms of overall copper revenue, while RIO generated most of its income from iron ore and aluminum.
The strong characteristics of both companies have put us in quite a predicament. As mentioned above, both have strong revenue-providing operations abroad, and both produce materials sure to rise in demand as the global economy continues to expand.
RIO has higher liquidity ratios, including but not limited to working capital, operating income to liabilities, and debt to capital. Its current ratio is also significantly higher. RIO has a stronger profit margin but a slightly weaker operating margin. Additionally, RIO is attempting to take over Riversdale Mining (RFLMF.PK) to further expand its international grasp.
RIO will take down this match-up, making for an interesting comparison against BHP.
We hope that this exercise was somewhat entertaining and thought-provoking. We would appreciate any feedback you may have in helping determine a winner.
See Part 2 here.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ATW, BHP over the next 72 hours.