Why Investors Should Avoid Or Short The Coal Sector Until Year-End

|
Includes: ANRZQ, ARCH, BTUUQ
by: Hawkinvest

Just about all attempts to call a bottom in the coal sector have
recently failed. The industry has been hit hard by a variety of issues including increased regulations, a glut of supplies that has pushed prices down, slowing global economies, and new competition from natural gas. Many utilities and other major companies are switching from coal to natural gas because of the abundant supply in the U.S. and very low prices. A number of coal companies have responded to the industry conditions by shutting down or otherwise reducing production. However, it has become clear that a short-term fix is unlikely for coal stock investors. Furthermore, many of these companies carry significant levels of debt. The best strategy could be to avoid the stocks in this sector until later this year. With no big catalysts in sight for the industry, and with plenty of investors suffering major losses, these stocks are likely to remain depressed and see even more pressure in the last quarter of the year when tax-loss selling occurs. Many of these stocks are now trading for one-third of the 52-week high, which means some investors will probably be looking to sell in order to harvest the tax benefits. Here are a few stocks to avoid for now, but perhaps revisit in the fourth quarter:

Arch Coal, Inc. (ACI) shares started out the year at about $15, but the industry conditions and stock market correction has pushed the shares below $6. Just a few months ago analysts had expected Arch Coal to post a solid profit, but losses are now expected for 2012, and it looks like roughly break-even results for 2013. That's why it's hard to see any catalysts that could provide a significant rebound for the stock. One concern for investors is the balance sheet. The company has just about $118 million in cash and around $4.07 billion in debt. That is worrisome especially for a company that might be reporting losses for the foreseeable future.

Here are some key points for ACI:
Current share price: $5.85
The 52 week range is $5.76 to $28.76
Earnings estimates for 2012: a loss of 43 cents per share
Earnings estimates for 2013: 2 cents per share
Annual dividend: 12 cents per share which yields 2%

Alpha Natural Resources (ANR) shares have taken a similar path lower as the stock has dropped from about $22 level early this year, down to around $8. This company has moved to cut output at certain mines in an effort to reduce annual coal production by about 4 million tons between now and 2013. Analysts expect the company to lose money for the next couple of years, which will probably keep investor interest low for the stock. As for the balance sheet, the company has about $589 million in cash and around $2.97 billion in debt. This would appear to put it in a better position compared to Arch Coal, but it is still a considerable burden to carry when the industry is facing serious challenges.

Here are some key points for ANR:
Current share price: $8.27
The 52 week range is $8.17 to $47.25
Earnings estimates for 2012: a loss of $1.01 per share
Earnings estimates for 2013: a loss of 65 cents per share
Annual dividend: none

Peabody Energy Corporation (BTU) shares have fared a little better
than some, but the stock has still dropped from about $31 in May, to just $23 today. This company is one of the largest producers of coal, and it has about $8 billion per year in revenues. In terms of the balance sheet, Peabody has about $952 million in cash and around $6.65 billion in debt. Analyst estimates have dropped, but one big positive for this company is that it is expected to remain profitable this year and next, while other companies are poised for losses. Another positive is that analysts at Goldman Sachs recently upgraded this stock from a neutral to a buy. This is based on hopes for a rebound in coal prices in the second half of the year and possibly stronger than expected demand from China. Peabody is probably best-positioned company for investors to consider playing a potential rebound in the coal sector. However, the best strategy for those wishing to invest in the sector might be to wait for year-end bottom fishing opportunities that often comes with tax-loss selling.

Here are some key points for BTU:
Current share price: $23.23
The 52 week range is $22.18 to $61.85
Earnings estimates for 2012: $2.68 per share
Earnings estimates for 2013: $3.60 per share
Annual dividend: 34 cents per share which yields 1.4%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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