Dear Santa, I’d like these coal stocks for Christmas…
Coal stocks took a big hit this year losing 50% or more of their value due to double-dip recession fears and worries about the eurozone. They are now at extreme undervalued levels, but still have solid expected earnings growth for the next few years.
Coal is mostly used as a fuel to produce electricity and heat by combustion. It is also widely used to make steel. The Ministry of Coal projected coal demand to be approximately 700 megatons (NYSE:MT) in 2011 – 2012. However, the availability is only 560 MT. This 140 MT shortage must be imported from other countries. Coal is the fastest growing energy source over all other energy types including: oil, gas, nuclear, hydro, and all of the renewable sources. This means that there will be plenty of demand to fuel the earnings and stock growth of the following coal companies.
Alpha Natural Resources (ANR) is a Virginia based mid-cap company with a market cap of $4.4 billion. ANR offers metallurgical coal for the steel making industry and thermal coal for electricity production and for use in manufacturing. Alpha Natural Resources is so undervalued that it is trading at half of its book value per share. Its forward PE ratio is 10.17 and its PEG ratio is a low 0.29.
ANR has operating cash flow of $719.78 million and levered free cash flow of $556.58 million. It has a solid balance sheet with 1.53 times more current assets than current liabilities. It has grown earnings annually at 32.06% for the last five years and is expected to grow earnings annually at 31.76% for the next five years. I think that the stock can easily double just to get back to its book value per share price. It’s not unreasonable to expect the stock to be above $70 five years from now (from its current price of $18).
Peabody Energy Corporation (BTU) is a $9 billion mid-cap miner and seller of thermal and metallurgical coal. Peabody is the world’s largest private sector coal company that fuels 10% of U.S. power and 2% of worldwide electricity. Peabody’s undervaluation is apparent as it sports a forward PE ratio of 6.47 and a PEG ratio of 0.26. The stock currently trades at only 1.7 times book value per share.
BTU rakes in an operating cash flow of $1.39 billion, an EPS of $3.47, and has a profit margin of 12.43%. It has a solid balance sheet with over 2 times more current assets over current liabilities. BTU has grown earnings annually at 17.91% for the last five years and is expected to grow them annually at 30.99% for the next five years. Add its 1% dividend and investors can expect to benefit with a total annual yield of 31.99%.
Arch Coal (ACI) is a $3.13 billion mid-cap miner of steam and metallurgical coal. Arch Coal supplies 16% of America’s coal supplies. Arch shows its undervaluation with a forward PE ratio of only 5.85 and a PEG ratio of just 0.34. The stock is currently trading around $2 under its book value per share.
ACI has an operating cash flow of $711.83 million, an EPS of $0.73 and a profit margin of 3.41%. Its balance sheet looks good with a 1.53 current ratio. Arch Coal is expected to grow earnings annually by 35.66% for the next five years. It also pays a nice dividend of 3.2%. When combining both, investors may enjoy a total annual yield of 38.86%.
Consol Energy (NYSE:CNX) is a $8.19 billion mid-cap miner of steam and metallurgical coal and producer of pipeline-quality coal bed methane gas. As of December 31, 2010 it had 4.4 billion tons of proved and probable coal reserves.
Consol’s undervaluation is demonstrated with its forward PE ratio of 9.92 and PEG ratio of 0.34. The stock trades at 2.39 times book value per share.
It has a nice operating cash flow of $1.5 billion, an EPS of $2.38, and a profit margin of 9.22%. Consol has 1.46 times more current assets than current liabilities.
Consol is expected to grow earnings annually at 35.75% for the next five years. When adding its dividend of 1.4%, investors could realize a total annual yield of 37.15%.
Alliance Resource Partners (NASDAQ:ARLP) is a $2.78 billion mid-cap producer of coal for utilities and industrial users. This company was the coal producing industry’s first MLP (master limited partnership). It operates mines & facilities in the Illinois Basin, Central Appalachia, and Northern Appalachia. As of December 31, 2010, it had 697.4 million tons of coal reserves. Its undervaluation shows with its forward PE ratio of 9.17 and its PEG ratio of 0.79. The stock trades at only 3.14 times book value per share.
ARLP has an operating cash flow of $558.68 million, an EPS of $8.01, and a profit margin of 16.7%. It has grown earnings annually at 19.78% for the last five years and is expected to grow annually at 11.44% for the next five years. When combining its generous dividend of 5.2% to its expected annual earnings, investors may enjoy a total annual yield of 16.64%.
Coal use is continuing to grow throughout the world. With coal being the most common and cheapest fuel for producing electricity in the United States, these companies are poised to benefit from a recovering economy. These stocks were punished recently and are clearly undervalued. Purchasing one now for at least a five year holding period should prove to be a wise investment. I wouldn’t mind having one of these coal stocks in my stocking this Christmas.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.