Coal has been one of the worst performing sectors in an already tough climate for investors. Even after huge declines, there could be more downside to come. A recent Bloomberg article summarizes the
challenges facing the coal industry and it states:
"A combination of cheaper natural gas, environmental regulations and a mild winter has spurred the closure of mines and the loss of thousands of mining jobs in the U.S. Domestic demand is at a 24 year low and the fuel has lost its status as the leading source of electricity, with gas accounting for the same share for the first time in at least four decades."
If that doesn't sound bad enough, famed distressed investor and energy billionaire, Wilbur Ross is quoted in the article as saying "This time the major secular trends are far more likely to be unfavorable for years to come." It goes on to say that he doesn't see any immediate buying opportunities. That is quite a statement considering that coal stocks are trading for a mere fraction of the 52-week highs.
Patriot Coal (PCX) recently filed for bankruptcy and if this drop in coal prices is secular, chances are strong that more coal companies will file for bankruptcy. There appears to be no major catalysts to create a rebound in this sector, and that could mean these stocks will face additional selling pressure when tax-loss selling kicks-in next quarter. Going past the next couple of quarters, the real issue could be the debt levels carried by many coal companies. Cash levels that are relatively low in comparison to the debt levels can also lead to downside pressure on a stock and ultimately even bankruptcy, as Patriot Coal shareholders recently witnessed. Investing in this sector has become fraught with risk, and investors should consider the balance sheet when evaluating investment opportunities. With the coal sector seeing what could be a secular decline, many coal companies carrying debt loads that could be unsustainable, and the economy facing another downturn, another bankruptcy filing in the coal industry seems quite likely. However, the stocks with stronger balance sheets might be worth watching and bottom-fishing later this year. Here is a closer look at some of the stocks and balance sheets in this industry:
Arch Coal, Inc. (ACI) shares have been hit hard in the coal industry shakeout. The stock trades for a fraction of its 2012 high. The balance sheet of this company is worth keeping an eye on as it has just about $118 million in cash and around $4.07 billion in debt. Analysts expect Arch Coal to lose money for the next couple of years which could put further strain on the balance sheet. Just days ago an analyst at BMO Capital Markets downgraded the shares over the margin and balance sheet concerns and set a $4 price target. With no major upside catalysts in view now, this stock looks poised to drift lower.
Here are some key points for ACI:
- Current share price: $6.05
- The 52 week range is $5.41 to $28.76
- Earnings estimates for 2012: a loss of 46 cents per share
- Earnings estimates for 2013: a loss of 18 cents per share
- Annual dividend: 12 cents per share which yields 2%
Alpha Natural Resources (ANR) shares were also downgraded by BMO Capital to underperform and it set a $5 price target. The analyst cited high debt levels and other issues, and estimates for 2013 were reduced from a profit of 24 cents to a loss of $1.23 per share. That is considerably worse than the consensus street estimates of a 91 cent per share loss for 2013. This company could face challenges with a balance sheet that has about $589 million in cash and around $2.97 billion in debt. I believe these shares will continue to trend lower.
Here are some key points for ANR:
- Current share price: $6.90
- The 52 week range is $6.53 to $47.23
- Earnings estimates for 2012: a loss of $1.07 per share
- Earnings estimates for 2013: a loss of 91 cents per share
- Annual dividend: none
Peabody Energy Corporation (BTU) appears to be one of the best-positioned coal companies and analysts expect it to remain profitable in this downturn. However, the balance sheet does have a significant amount of debt which will be more of a factor if the company misses earnings in the future. In terms of the balance sheet, Peabody has about $952 million in cash and around $6.65 billion in debt. This company recently cut its capital expenditures budget by about $200 million in order to respond to the changing industry conditions. It also said it recently bought back $100 million worth of stock in order to take advantage of the low share price. While this stock could be an eventual buy, there seems to be few catalysts to get in now. Because of this, it makes sense to revisit this stock for a potential buying opportunity later this year.
Here are some key points for BTU:
- Current share price: $22.79
- The 52 week range is $20.67 to $61.81
- Earnings estimates for 2012: $2.55 per share
- Earnings estimates for 2013: $3.28 per share
- Annual dividend: 34 cents per share which yields 1.5%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: 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.