5 Coal Companies To Consider

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Includes: ANRZQ, ARCH, JRCCQ, PCXCQ, RIO
by: David White

Recently ArcelorMittal (NYSE:MT) and Peabody Energy (BTU) made a winning bid for Australian coal producer Macarthur Coal (OTC:MACDF). On Sept. 7, a report from the London Times said that Anglo-American is thinking of offering $120 per share for Walter Energy (NYSE:WLT). The report suggested that BHP Billiton (NYSE:BHP) might be interested in buying WLT too. This hinted that the price could go even higher than $120 per share. WLT went up $15.99 on the rumors to $90.98, even though there has not been a confirmed offer. Most other coal stocks went up significantly in sympathy.

This brings to mind a comment by Peabody Energy’s chairman and CEO Gregory Boyce, who stated in June 2010, “I believe we are in the early stages of a long-term super cycle for coal.” Boyce pointed out that coal had been the world’s fastest growing fuel over the last decade. Boyce expects this trend to continue with Asian nations building more coal-fired power generation plants He said that more than 94GW of new power generation plants were supposed to come online by the end of 2010, resulting in 375 million tons a year of coal consumption. He speculated that the current pace of generator addition would add another one billion tons of new thermal coal demand every three years. Boyce stated that steel demand was expected to increase by 50% by 2020, with a similar increase in demand for metallurgical coal expected. Boyce stated that seaborne coal demand should increase by 300-400 million tons by 2015 with China and India responsible for one-half to two-thirds of this demand growth.

After the above described recent buyout events, there's speculation about a buyout frenzy for coal stocks. Some may be doing this on legitimate beliefs. Others are likely taking advantage of the current frenzy to drive some of the currently downtrodden coal stocks upward. The words of Boyce are close to true, if not completely true. The coal equities deserve to be trading at higher multiples. Some of the coal equities with the big percentage differences between the current price and the analysts’ forecast one year price target are James River Coal Co. (JRCC) -- 102%, Arch Coal Inc. (ACI) -- 78%, Rio Tinto Plc (NYSE:RIO) -- 67%, Patriot Coal Corp. (PCX) -- 66%, Alpha Natural Resources Inc. (ANR) -- 57%, Cliffs Natural Resources Inc. (NYSE:CLF) -- 52%, Peabody Energy Corp. -- 52%, and Consol Energy Inc. (NYSE:CNX) -- 44%. Some of these may actually be buyout targets. The smaller ones are more likely targets. However, you don’t want to invest in a stock just because it is a buyout target, although you might speculatively buy WLT if you are daring. All of the above are probably worth investing in, but let’s look at a few more thoroughly. Let's look at the top five forecasted percentage gainers. The table below has some fundamental financial data about these stocks. The data are from TDameritrade and Yahoo Finance.

Stock

JRCC

ACI

RIO

PCX

ANR

Price

$10.56

$20.46

$59.76

$15.17

$33.44

1 yr Analysts’ Target price

$21.30

$36.47

$99.98

$25.25

$52.50

Predicted % Gain

102%

78%

67%

66%

57%

PE

10.98

21.38

7.33

N/A

114.52

FPE

16.76

5.53

5.81

9.14

9.24

Avg. Analysts’ Opinion

2.7

2.0

1.5

2.4

2.0

EPS % Growth Estimate for 2011

-68.30%

76.30%

26.90%

61.50%

33.80%

EPS % Growth Estimate for 2012

-1.60%

84.10%

14.20%

321.30%

25.30%

5 yr. EPS Growth Estimate per annum

13.40%

18.25%

9.00%

5.00%

27.65%

Market Cap

$366.43M

$4.36B

$115.18B

$1.38B

$7.57B

Enterprise Value

$699.83M

$8.48B

$121.14B

$1.41B

9.72B

Beta

2.08

1.88

1.68

3.27

1.87

Total Cash per share (mrq)

$5.90

$0.39

$4.07

$2.88

$6.33

Price/Book

0.74

1.12

1.78

1.44

0.81

Price/Cash Flow

3.24

7.51

5.56

10.76

11.7

Short Interest as a % of Float

23.98%

2.98%

0.36%

11.52%

5.32%

Total Debt/Total Capital (mrq)

55.92%

54.29%

20.78%

35.12%

29.80%

Quick Ratio (mrq)

2.0

0.93

1.22

1.02

1.16

Interest Coverage (mrq)

1.06

1.26

--

0.10

--

Return on Equity (ttm)

8.24%

5.68%

29.52%

-7.43%

0.67%

EPS Growth (mrq)

-96.90%

-84.41%

28.69%

9.40%

-212.90%

EPS Growth (mrq)

-44.10%

73.59%

73.55%

-222.37%

-8.41%

Revenue Growth (mrq)

92.32%

28.89%

18.38%

17.29%

59.28%

Revenue Growth (ttm)

24.02%

26.68%

25.59%

11.04%

33.12%

Annual Dividend Rate

N/A

$0.44

$1.17

--

--

Gross Profit Margin (ttm)

20.25%

26.07%

--

12.26%

21.54%

Operating Profit Margin (ttm)

5.11%

9.36%

37.94%

0.05%

2.20%

Net Profit Margin (ttm)

3.32%

4.54%

28.36%

-2.97%

0.78%

Click to enlarge

This data indicates that RIO is the strongest of the five stocks. With an analysts’ estimated percent gain of 67%, it is probably the best and safest investment. Unfortunately it is likely too big to be a buyout target. ACI is perhaps the second best investment of these stocks. In addition to its relatively good fundamental numbers, it is actively working to increase its shipping capability from ports on the West Coast of the US. This will allow it to increase its sales to Asia soon. This should be a big boon. ANR is probably still suffering merger pains from its purchase of Massey Energy. You could play for the improvement, which should eventually come, or you could wait until the improvement is more easily visible. It seems a possible buyout target. PCX and JRCC represent potential big gainers, but have questionable financial fundamentals. I would tend to stay away from weaker stocks that might fall hard in a recession, even if they might be buyout targets. In the short term, if coal equities rally hard on a buyout frenzy, PCX and JRCC would likely both do well. They would both likely get short squeezed higher, since both have high short interest.

Let’s look at the two-year charts to get some technical elucidation about possible trades, shall we?

JRCC

Click to enlarge

ACI

Click to enlarge

RIO

Click to enlarge

PCX

Click to enlarge

ANR

Click to enlarge

JRCC is near oversold levels on its slow stochastic sub chart. I am not sure this is a good thing. All of the others have moved substantially off their bottoms on their slow stochastic charts. Laggards are not usually the best investment. Otherwise it looks like it may be a good turnaround stock if positive conditions persist long enough.

All of the other four look like they have put in good Bollinger Band double bottoms. The MACDs of each look to be set up for a run upward. Each stock is far below its 200-day moving average. Since the news about coal supply and demand has not been bad, one would expect these stocks to move back toward their 200-day moving averages soon. If you add these technical observations to the fundamental ones above, you would likely still see RIO and ACI as the best buys among the five stocks more throroughly. I should mention that RIO also mines quite a lot of gold. This might tend to lift the stock. Of course, both BTU and CLF are great companies. These are likely great buys too. CNX is a big coal company, but it has never impressed me as being as well run as BTU or CLF. I would want to take a much harder look at it before investing in it.


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIO, ACI, BTU, CLF over the next 72 hours.