Playing with Fire; Coal Industry
If anyone reading this has glanced at coal this last year you surely noticed the coal industry decline. Wait, that's being too nice, you surely noticed the complete nose dive in coal company stock prices. There's some really attractive companies out there that are insane values at this point in time. As with any sector, there's the good, the bad and really ugly. Let's discuss some of the well known coal companies and offer suggestions if you're going to play with fire!
Two coal powerhouses are Peabody Energy (NYSE: BTU) and Alpha Natural Resources (NYSE: ANR). Peabody Energy's management has done an excellent job to place them as top dog in the industry. Peabody is the largest private sector coal producer in the world, and controls the largest reserves at about 9 billion. They also have leading market share in the fastest growing U.S markets. They made a brilliant strategic move by acquiring Macarthur Coal Limited, located in Australia.
"The Macarthur purchase advances Peabody's strategy of expanding our global platform to serve major global demand centers and raising our contribution from higher-margin international assets," said Peabody Chairman and Chief Executive OfficerGregory H. Boyce.
This positions Peabody Energy very well for the future metallurgic coal demand from the pacific rim. Investors seem to have forgotten that, because of developing countries, coal is still the fastest growing fuel in the world! China has become a net coal importer. Japan, South Korea, India and vietnam are looking for sources to purchase high-quality thermal and metallurgical coal. Peabody will be more than happy to feed them coal until their hearts are content. In 2011, Peabody had record revenues, adjusted EBITDA, operating profit, net income, operating cash flows. After all of that, Peabody Energy stock is down over 50% from a year ago. The P/E ratio of 6 screams BUY. The 1.6% dividend isn't going to rock your socks off, but it is worth noting.
Alpha Natural Resources has taken one heck of a beating. Like Peabody, Alpha is also a significant exporter of premium metallurgic coal. Alpha has a pretty solid balance sheet but their acquisition of Massey Energy might have been a little expensive. Alpha is a good company and would seem like a great value play. Obviously, that has it's risks... Yes, that was foreshadowing my "Ugly" section.
James River Coal Company (NASDAQ: JRCC) has so many red flags I stopped counting. Their cash flow is trending the wrong way and their earnings are non-existant. Their % Long Term Debt of Capitalization is 59%, that's bad JRCC, very bad. JRCC will be in serious trouble next year unless there's a quick rebound in the Coal Industry. Let's be honest, speak up if you predict a quick rebound in anything right now?
Go ahead, I'm waiting...
It gets worse for this poor fella, JRCC mines over half of it's coal from Central Appalachia and that tends to be more expensive and if they can't find a way to keep costs down they're going to die a much quicker death. I'd short this company if I felt it'd be worth the time and actually be of some value down the road. Instead, JRCC will stay on life support, and I won't be touching the stock with a ten foot pole.
Oh Patriot Coal, how you burned me so. Not in real life investing, ofcourse. I was "brave" enough to put an outperform call in Motley Fool CAPS once it hit the $2 mark. Trying to catch falling knives can be quite dangerous, and resulted in a lovely -99.91 score. Ouch is right. Since Patriot crashed and burned, JRCC likely will receive no additional financial help and will eventually lead to it's demise. Industry consolidation is imminent, pick the last man standing, and you could find yourself with great gains when stockpiles thin and demand returns.
Fool me once Coal...
No more playing with fire for me, no more silly plays in coal. Coal isn't going away anytime soon and there's companies that have positioned themselves for future success. Peabody Energy is going to reward patient investors over the next 5 years. This summer has been an absolute scorcher and should help deplete coal stockpiles! Natural gas prices are rising and that should send some relief for coal prices. Yes we all know coal is dirty energy, and yes we'll likely be focusing on Natural Gas in the near future. However, until that point Coal will still generate much of our energy. Not only that, Peabody has an excellent presence globally and is a steal at this price. I'm patiently waiting for a bottom to this nose dive and will jump in for a great company at a great price.