Recent Rally Gives Coal Companies Pricing Power

The sharp rise in oil, the rally in corn and wheat and the high cost of metals (a nickel is now worth approximately 7.5 cents) have overshadowed another commodity that also continues to appreciate - coal. Coal futures are currently trading at $104, compared to $58 at the start of the year.

The impact of this appreciation, as one might assume, was highly noticeable in the earnings from coal companies. Alpha Natural Resources (ANR) said last week that it "achieved the highest quarterly price realization in its history due to rising metallurgical coal exports and price levels."

ANR's first-quarter sales totaled $445.7 million, an increase of 17% from a year prior. The amount of coal tonnage sold rose just 6.9%, however, signifying the impact that higher prices had on revenue growth. Earnings per share reached 39 cents, compared to 13 cents a year ago. (Brokerage analysts had been expecting first-quarter profits of 17 cents per share.)

ANR is not the only company to benefit. Arch Coal (ACI), Massey Energy Company (MEE), Natural Resource Partners (NRP) and Peabody Energy (BTU) all realized higher revenues and profits last quarter.

There are several reasons why coal is rising. The overall rally in commodity prices is providing upward momentum. Economic growth in China and India has increased worldwide demand. Higher natural gas prices are keeping coal an economically viable alternative for power. Even the production of steel is playing a role.

Brokerage analysts have significantly raised full-year earnings estimates on all five companies. The magnitude of the revisions suggests a reassessment of the price coal will command throughout the remainder of the year. As is the case with oil, brokerage analysts are realizing that their previous projections were too conservative.

Forecasts for 2009 are also rising. This is important, because it implies that valuations for all four stocks remain within reason despite the sizable returns they have generated for investors this year.

ANR and MEE are Zacks #1 Rank ("strong buy") stocks. ACI, BTU and NRP are Zacks #2 Rank ("buy") stocks. All five companies are classified in Coal.

Comments

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2008 May 21 02:23 PM