Alpha Natural Resources: Resounding Buy In Anticipation Of A Coal Recovery

Feb.27.12 | About: Alpha Natural (ANRZQ)

Alpha Natural Resources (ANR) is another coal stock that has been hammered by investors. The stock is currently trading at just above $20 a share, nearly 70% lower off its 52 week high of just under $62. The stock has been hit for some of the same reasons that other coal stocks have been hit as prices for coal have come down a lot.

However, the company is still one of the biggest producers of coal in the country and has significant exposure to high quality coking coal that sells at a significant premium to the more predominant, thermal coal, utilities use to generate electricity. As the economy continues to recover and demand for steel rises, as it usually does in a recovery, demand for high quality coking coal should increase. Prices for thermal coal should return to more normal levels as the impact from some of the recent events, such as a warmer than expected winter, abates.

On the valuation front, the stock looks like a bargain as the trailing valuation metrics and analysts suggest that the stock is significantly undervalued. On a forward valuation, the stock seems overvalued but that holds little value for ANR because of the deep decline in coal stocks. Below is an in depth look at the valuations.

Valuation: Alpha Natural Resources' trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. Alpha Natural Resources' current P/B ratio is 0.5 and it has averaged 3 over the past 5 years with a high of 11 and low of 0.5. Alpha Natural Resources' current P/S ratio is 0.7 and it has averaged 1.3 over the past 5 years with a high of 3.4 and low of 0.5.

Price Target: The consensus price target for the analysts who follow Alpha Natural Resources is $31. That is upside of 50% from today's stock price of $20.46 and suggests that the stock is undervalued at these levels. This also suggests that the stock has significant upside and is an attractive opportunity at these levels.

Forward Valuation: Alpha Natural Resources is currently trading at about $20 a share with analysts expecting EPS of $1.65 next year, an earnings increase of 67% y/y, for a forward P/E ratio of 12.4. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. Peabody Energy (BTU) is currently trading at about $36 a share with analysts expecting EPS of $4.74 next year, an earnings increase of 44% y/y, for a forward P/E ratio of 7.7.

Arch Coal (ACI) is currently trading at about $14 a share with analysts expecting EPS of $1.39 next year, an earnings increase of 30% y/y, for a forward P/E ratio of 10.3. Consol Energy (NYSE:CNX) is currently trading at about $36 a share with analysts expecting EPS of $3.2 next year, an earnings increase of 18% y/y, for a forward P/E ratio of 11.4. The mean forward P/E of Alpha Natural Resources' competitors is 9.8 which suggests that Alpha Natural Resources is overvalued relative to its publically traded competitors.

Earnings Estimates: Alpha Natural Resources has beat EPS estimates 1 time in the past 4 quarters. The company's EPS figures have come in between -33 cents and 31 cents from consensus estimates or about -126.9% to 775% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.

Price Action: Alpha Natural Resources is down 61.9% over the past year, underperforming the S&P 500, which is up 6.8%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $20.68 and below its 200 day moving average, which sits at $30.47.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.