Patriot Coal (PCX) is primarily a thermal coal miner selling to electricity producers in the United States. The miner took a -12.8% beating last Friday after announcing the closure of 5 West Virginia mines, and whenever I see a company take a dip like that my contrarian side comes out.
Patriot Coal also piqued my interest due to their low price to book (P/B) ratio of 1.02, not quite in the zone of really deep value potential but still an indication of significant duress on the company's stock price. I got curious about the assets that shareholders might expect they'd get with their shares, so I did a little dive.
In this chart I've paired up assets listed in order of reported liquidity on the left hand side and the stakeholders of the company in order of most secured (since all liabilities are more senior to stockholders, I have not broken out liabilities).
As we can see, the name of the game for investors looking for an asset play in PCX is property, plant and equipment (PPE). In fact, PPE makes up 84% of the total assets of PCX, understandable for a mining company.
Because of the fact that PCX doesn't trade below a P/B of 1, what you see is what you get from an asset perspective in terms of book value per share. Absent the additional value potential for your land and mining rights not appropriately reflected with cost accounting, an aggressive investor looking for liquidation value potential would find little with PCX.
But not all companies need to be liquidated, and one could plausibly make the argument that the low P/B could serve as a value backstop for investing in the earnings power of the company. Unfortunately, traditional measures like price to earnings (P/E) are unhelpful for valuing PCX, as they have only been profitable once in the last five quarters, and the one by such a minute margin so as to make it not worth mentioning.
So if the asset value play isn't convincingly there, and the earnings value play doesn't exist, is there anything to gain from PCX or is this just a sinking ship?
Coal has been a really tough industry as of late, largely due to the success of 'fracking' to expose massive amounts of natural gas in North America. The plunging price of natural gas has in turn placed a lot of pressure on coal, which has largely diminished its short-term appeal as a fuel source. Additionally, coal takes a lot of pressure on the long-term, as renewable energy and as of late declining solar prices seem eager to remove coal as the electricity generating fuel of choice. Thus, it is not inconceivable that coal may never regain historical price levels.
With this bearish perspective in mind, I ran an Altman Z-score bankruptcy test on PCX to see what a third-party formula had to say about PCX's future. For input sources, I used the trailing nine months released in their most recent 10-Q plus mean analyst estimates for their 4th quarter. For inputs like interest expense, I prorated them for the year.
The result of the test yielded a result of 0.819, which puts PCX below the <1.8 threshold for highly likely heading for bankruptcy. In this instance, Patriot Coal appears to be if anything a company likely on its way out with little value offered to shareholders.