Massey Energy (NYSE:MEE) reported first quarter FY11 earnings earlier this week. Net revenues for the quarter increased 38% compared with the same period last year. The produced coal segment, which has the largest share of net revenues and accounts for 82% of our stock value, increased revenues by 45%. Massey Energy is the 4th largest coal company in the United States and the largest in Central Appalachia based on produced coal revenue. Massey competes with companies like Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and CONSOL Energy (NYSE:CNX).
Revenues Up & Margins Down
The increase in produced coal revenues was driven by increases in both tons of produced coal and the average revenue per ton, both of which increased by around 20% year on year (y0y).
However, the company’s profit margins were down considerably largely driven by an increase in average cash cost per ton of coal sold, which increased almost 20% yoy. The increase in cash cost per ton was due largely to fixed costs being spread over lower than expected production, as well as higher sales related costs due to higher average sales prices. This was further compounded by increasing costs for mining supplies and labor. However, the company believes that it can achieve cost improvement as the year progresses.
The considerable increase in revenue per ton was driven by improving market prices with prices for metallurgical coal and industrial coal shipped in Q1 2011 increasing 53% and 12%, respectively. Going forward, prices for the different grades of coal should continue to increase. 
Coal Sold to Utility Customers Expected to Increase
We estimate that the produced coal division constitutes around 82% of our $63.19 price estimate for Massey’s stock, which stands slightly below the current market price.
In the produced coal division, Massey derives maximum value from selling coal to utility customers, which we estimate constitutes around 46% of its stock price vs. selling coal to metallurgical customers and industrial customers, which constitute 28% and almost 9% respectively of our stock price estimate.
The produced tons of coal sold to utility customers was not greatly impacted during the recent economic downturn, decreasing only 10% between 2005 and 2010. However, in Q1 2011, it increased considerably at 36.5% yoy with demand for coal getting a boost as we moved out of the economic downturn.
Going forward, we expect it to increase to nearly 35 million tons by the end of our forecast period from 26 million tons in 2010, an annual growth rate of around 4.3%. However, if it increases 2 percentage points faster average at 6.3% per year to reach around 40 million tons by the end of our forecast period, there can be an upside of nearly 10% to our current price estimate for Massey’s stock.
Disclosure: No positions