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Emerging market growth means more need for steel. This in turn means more need for metallurgical coal. The World Bank estimates the world GDP will rise by 3.3% in 2011. India’s GDP for Q1 was 8%. China’s was nearly 10%. China also accounted for 70+% of the growth in the coal consumption recently. Most expect this general trend to continue. China makes about 50% of the world's steel. If China’s GDP is growing at approximately 10%, this means that the demand for metallurgical coal is growing. Plus, there has been damage to the coal producers' infrastructure with the storms/flooding in Queensland, Australia. All of these reasons explain why metallurgical coal prices are expected to rise this year.

Taking a brief technical look at the markets, one can see that coal stocks, as represented by the proxy of the KOL ETF, are at oversold levels in the short-term.

click to enlarge images

1 year chart of KOL:

Both the Williams %R indicator and the Fast Stochastic indicator show that KOL is oversold. Neither means that coal cannot become more oversold. In fact, if oil continues to sell off, it seems likely coal will follow along with it. Currently oil is near $100. There is good support at $95 as it hit $94.63 early Friday morning. This bounce-off support could continue if we get good economic news this week.

Longer-term, its direction may depend on tightening actions in China and India, the state of the credit crisis in the EU and a rising or falling trend in the USD. However, coal has an advantage over oil. It is tied directly to the powerhouse economies of China and India. By contrast, oil is tied more directly to the US and the EU, which are both troubled at the moment. If those economies worsen, they may cut back on oil. Admittedly, coal will suffer along with oil, but the effects may be a little less. It should be safer, and coal will go up over time.

There seems to be a growing chance of a Greek default/haircut within the next few months. Irish PM Enda Kenny is strongly hinting that Ireland will give debt holders a haircut at at least some of its banks. Portugal has tentatively agreed to an EU/IMF bailout. However, it has no government until the early June elections. The last government was dissolved because it would not approve an austerity package, which was a necessary prerequisite to a bailout. Plus, the Finns, with significant opposition from the True Finns, may not be able to get approval for the Portugal bailout through their Parliament, especially with the uncertainty of recouping the Greek bailout monies. They must legally do this before Finland can agree to the bailout. In sum, the EU credit crisis could easily escalate to a post-Lehman Brothers like “credit seize up” at almost any time. Any prudent investor will be watching this situation carefully.

More immediately, the direction of commodities such as oil and coal may depend on US jobs and the nascent rally in the USD. The Nonfarm Payrolls data was good on Friday, but the recent Initial Claims data has been bad. Additionally, the recent rally in the USD may push commodities downward, especially if the USD carry trade really starts to unwind. Still, with the good Nonfarm Payrolls number on Friday, this might be a good time to start averaging into coal stock(s) position(s). At worst, you could trade short-term.

If the jobs number is bad, it may be a good idea to wait for a better entry point. Long-term, the overall growth of metallurgical coal seems inevitable for the next 5+ years. With that in mind, the table below contains some of the fundamental data for several prominent metallurgical coal companies:

Stock

WLT

ACI

BTU

ANR

PCX

Price

$131.08

$30.90

$62.22

$51.21

$23.89

Analysts’ 1 year target price

$155.58

$40.18

$76.32

$70.94

$29.90

PE

16.48

23.44

20.77

46.72

--

FPE

8.34

7.86

10.49

8.26

8.75

Analysts’ Average Recommendation

2.0

2.3

1.9

2.0

2.7

Beta

1.90

1.64

1.21

1.56

2.86

Price/Book

10.16

2.2

3.44

2.27

2.58

Price/Cash Flow

15.29

8.8

13.03

9.05

18.87

Cash/share

$5.52

$0.58

$4.79

$6.39

$2.64

Short Interest as a % of the Float

9.90%

7.10%

2.90%

28.90%

8.40%

5 year EPS Growth Estimate per Annum

18.00%

76.50% (from Yahoo Finance) ??

22.53%

27.63%

5.00%

Market Cap

$6.73B

$5.03B

$16.71B

$6.25B

$2.16B

Enterprise value

$7.21B

$6.74B

$18.99B

$6.67B

$2.51B

Total Debt/Total Capital (mrq)

19.03%

41.13%

35.91%

21.80%

35.05%

Quick Ratio (mrq)

1.57

1.13

1.63

2.43

1.02

Interest Coverage (mrq)

35.23

3.13

5.96

5.44

0.35

Return on Equity (ttm)

86.75%

9.84%

18.48%

4.96%

-7.56%

EPS Growth (mrq)

93.64%

3,169.62%

30.94%

239.35%

-462.45%

EPS Growth (ttm)

286.22%

2.357.59%

83.74%

202.16%

-163.31%

Revenue Growth (mrq)

30.98%

22.63%

15.13%

22.64%

23.49%

Revenue Growth (ttm)

69.16%

28.40%

16.70%

40.74%

8.13%

Annual Dividend Rate

$0.50

$0.44

$0.34

--

--

Operating Profit Margin (ttm)

38.15%

11.57%

19.43%

4.70%

-0.24%

Net Profit Margin (ttm)

25.44%

6.48%

11.96%

3.21%

-3.15%

From all of this data (margins, return on equity, revenue growth (ttm), 5 yr EPS growth estimate, interest coverage), I can discern that I would not invest in PCX at this time. WLT and BTU look to be the better investment choices. WLT has the best growth, but its price/book ratio is scary for a value investor. BTU may be better for the more conservative investor. ANR and ACI both have appeal, but each has one or more negatives. I don’t like the lower net profit margin in either case. Still, both ANR and ACI have recently made major purchases. They are likely worth watching for the future.

Given the above information, I have shown the 1 year charts of both WLT and BTU (the likely best investments) below.

WLT 1 year chart:


BTU 1 year chart:


Both of these stocks are at or near oversold territory. They are set up to rebound upward as long as commodities in general do the same thing. The Money Flow Index is particularly indicative. Money was not really pouring out of these stocks for the last few days until the massive commodities sell-off on Thursday. They wanted to go up even in the face of the silver, oil, etc. sell off. The good Nonfarm Payrolls data on Friday may be a sign to start averaging in. Still, there is no green light on commodities yet. It may be best to average in conservatively. If you are thinking long-term, coal has a lot of growth potential.

Good luck trading.

Source: Opportunities in Metallurgical Coal: What to Consider, Which Stocks to Buy