We take a look at a list of energy companies with varying degrees of upside. In this article, I compare two coal companies, Peabody Energy (BTU) and Arch Coal (ACI), to an oil and gas company, Valero (VLO). I find strong upside for all of the companies, but considerable more risk for the coal producers. I am optimistic about the energy sector, in general, due to the rising industrial supply that will result from the United States hitting full employment. Accordingly, I rate all three of these companies "strong buys".
Arch Coal trades at 12.8x past and forward earnings, with a dividend yield of 4.6%. Consensus estimates for Arch Coal's EPS forecast that it will decline by 46.7% to $0.57 in 2012, and then grow by 31.6% and 65.3% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $0.73, the stock would hit $10.95 for 16.4% upside.
The stock is more than 80% volatile than the broader market and profitability has fluctuated heavily in the past. At the same time, the fundamentals of the business are attractive. The company currently has around 5.5B tons in its reserve base. Management has taken a conservative view of 2012 with assuming that domestic coal consumption will decline ~50M tons from the preceding year. This has set the bar artificially low in the light of the global recovery. Met coal, in particular, remains a meaningful catalyst, but is very dependent on thermal pricing.
Valero trades at a respective 6.7x and 5.5x past and forward earnings with a dividend yield of 2.4%. Consensus estimates for the company's EPS forecast that it will grow by 15.1% to $3.89 in 2012, grow by 14.9% in 2013, and then fall by 16.3% in the following year. Assuming a multiple of 7x and a conservative 2013 EPS of $4.44, the stock would hit $31.08 for 24.5% upside.
The company is cheap, based on its historical PE multiple. In fact, the company trades less the book value, despite seeing margin growth and facing globally positive secular trends. With that said, Valero has only beat estimates one time out of the last four quarters with a variance of -40% to 9% of consensus estimates. These missed expectations, however, are outweighed by the cheapness.
Peabody trades at 8.1x past and forward earnings, with a dividend yield of 1.1%. Consensus estimates for Peabody's EPS forecast that it will decline by 29% to $2.67 in 2012, and then grow by 35.6% and 65.6% in the following two years. Assuming a multiple of 11x and a conservative 2013 EPS of $3.59, the stock would hit $39.49 for 31.1% upside.
In 1Q12, the company grew EBITDA, revenue, EBIT, and cash flows from both domestic and Australian operations. In the light of poor Australian weather, the results were a positive start to the year. Revenue grew 17% to $2B on greater Australian pricing and better volumes. Ultimately, diluted EPS came out to $0.64 being at the high-end of guidance. At these low multiples and better-than-expected momentum, Peabody is a bargain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.