4 Coal Stocks Poised to Profit in 2011
NEW YORK (TheStreet) -- The bullish trends for the coal industry persist despite the concerns about its polluting ways -- and the impact of future environmental legislation.
Most recently, construction and mining equipment giant
Caterpillar
(CAT) - Get Report
said it was buying mining equipment peer
Bucyrus
( BUCY) for $8.6 billion, which Dion Money Management's president Don Dion told
RealMoney
readers is a sign that Caterpillar executives see the potential in the coal production industry. In the short-term, Caterpillar appears to have overpaid for this business, but in the long-term, the payoff is expected to be bountiful in the minds of many equity analysts, including Morningstar's Adam Fleck.
The latest wave of confidence in the coal industry has spawned, in part, from news that state-run
Coal India,
the world's biggest coal producer, has expressed interest in buying coal assets from U.S. producers
Peabody Energy
(BTU) - Get Report
and
Massey Energy
( MEE). As India continues to grow at breakneck pace, Coal India finds itself scrambling to meet the demand for coal from power plants and steel mills.
Peabody Energy is up about 29% year-to-date and up about 68% over a five-year period, outperforming the S&P 500 in both periods. Massey Energy is up about 14% year-to-date and up about 28% over a five-year period, also outperforming the S&P 500 in both periods despite its production troubles and the harsh regulatory challenges it faces after the producer's catastrophic West Virginia mining explosion on April 5. Likewise, the
Market Vectors-Coal ETF
(KOL) - Get Report
has outperformed the S&P in both periods, up about 20% year to date and up about 19% over a five-year time span.
The International Energy Agency (IEA) said coal and natural gas will remain the dominant sources of power generation in 2035, but will drop to a 55% share in 2035 from 68% in 2008, as nuclear and renewable resources expand. The IEA expects coal demand to peak before 2020.
As the coal sector remains hot over the next few years, which coal stocks are analysts looking at for the biggest upside potential? Read on to find out....
Peabody Energy
Number of Analyst Views: 25
Number Buy Ratings: 10
Number Strong Buy Ratings:10
Standard & Poor's Analyst Mathew Christy holds a buy rating on Peabody Energy based on his expectations of higher coal demand from utilities and the notion that metallurgical coal demand will remain strong around the world -- driven by the ongoing robustness of the steel market. Christy projects that Peabody's businesses will continue to expand through the company's focus on western U.S. and international assets, which provides "direct" access to the Asian markets.
"We view BTU's valuation as compelling, with the stock recently trading at about 6.3X our 2011 EBITDA estimate, below its five year historical average," Christy wrote in an investor note.
Arch Coal
(ACI) - Get Report
Number of Analyst Views: 25
Number Buy Ratings: 8
Number Strong Buy Ratings: 7
Howard Weil Analyst Holly Stewart holds a market outperform rating for Arch Coal. "It's a thermal story ... one that's cheap with big free CF (cash flow), and will look to return cash to shareholders," Stewart says in an investor note.
Stewart has raised her 2010 earnings target for the company to $1.25 from about $1.16 a share based on a "solid" third-quarter. She increases her 2011 and 2012 targets for the company to about $2.68 a share from $2.39 and to $3.93 a share from about $3.32, respectively, on Arch Coal's bump in expected contracted sales volumes and prices. Excluding any additional contracts in the last two months of the year, Stewart expects Arch Coal to be about 75% contracted heading into 2011.
Arch Coal management, for its part, remains bullish about the its Powder River Basin market, one of the world's largest coal-producing regions.
Alpha Natural Resources
(ANR)
Number of Analyst Views: 21
Number Buy Ratings: 7
Number Strong Buy Ratings: 8
Despite Alpha Natural Resources' third-quarter earnings miss and expected higher cost of coal sales, Citi Analyst Brian Yu continues to view Alpha Natural Resources as one of the cheaper coal stocks in the sector. It trades at a price-to-earnings multiple of about 12.4x 2011 vs. its peer group average of 12.8x. Yu also says the company's free cash flow yield of about 6.6% in 2010 and 8% in 2011 is "reasonable." He maintains a buy rating on Alpha Natural Resources stock, but says it's high-risk, like many of its peers.
Recently, Yu explains, there has been a lot of volatility in coal equity prices driven by swings in coal prices, coal sector earnings and regulatory challenges in the Central Appalachia coal producing region. Furthermore, Alpha Natural Resources' metallurgical coal business is vulnerable to any weakness in steel demand.
"However, ANR is one of the better operators in our coverage, and the company's acquisition of
Foundation Coal
provides the company with low-cost assets and multi-regional presence in the U.S.," says Yu, in client note.
Consol Energy
(CNX) - Get Report
Number of Analyst Views: 23
Number Buy Ratings: 10
Number Strong Buy Ratings: 5
Tudor, Pickering, Holt Analyst George O'Leary views Consol Energy as undervalued for a number of reasons. First, the company is a "hybrid," with businesses in both the coal and natural gas sectors, "which is something investors often have a hard time understanding or appreciating," O'Leary said. They're more accustomed to investing in gas companies for gas exposure or coal companies for coal exposure, "not a company that has significant exposure to both commodities," he explains. Once investors begin to see the value of investing in a hybrid company, Consol Energy could take off.
Another upside aspect O'Leary sees for Consol Energy is the potential for gas prices to increase. With gas prices low and coal prices robust this year, "Consol Energy has lagged its coal producer peers," he says.
-- Written by Andrea Tse in New York.
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