NEW YORK (TheStreet) -- I've written before on the reasons to be bullish on coal as Peabody Energy (BTU) - Get Peabody Energy Corporation Report, the sector blue-chip, and Market Vectors Coal (KOL) - Get VanEck Vectors Coal ETF Report, the exchanged-traded fund, are both up for the last week and month of market action.
Market Vectors Coal has also risen for the last quarter, six months and year of trading. It also outperformed United States Oil (USO) - Get United States Oil Fund LP Report, the exchange traded fund for oil, and United States Natural Gas (UNG) - Get United States Natural Gas Fund LP Report, the exchange traded fund for natural gas, over the last month, quarter, and six months.
There are many reasons to expect Peabody Energy, Market Vectors Coal, and other securities from the coal group to reward long term investors.
The first is the easiest to comprehend and the most important: demand. Over the last decade, coal use has added more to the global energy supply than any other source. Coal provides electricity for more than 40% of the world and that too is increasing. The amount of power that comes from coal in the U.S. is now at 42%, nearly a one-fifth jump from 2012 when it was at 36%.
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Next is that coal is the easiest fuel source to access. Coal can be dug up and carried home to provide heat and power: try doing that with oil, natural gas, or any form of alternative energy. In a recent article in Real Money, Glenn Williams laid out why, "…liquefied natural gas is a nation’s last fuel of choice." Natural gas and oil require extensive, expensive pipeline networks. Ease of use is why the demand for coal has increased globally and will continue to do so in the future.
For all of its problems, coal has many other advantages over oil, natural gas, and alternative energy, too. It is not only the easiest to access, it is also the easiest form of fuel to store. That is the great weakness of alternative energy. Shipping coal is much safer, too: if a train carrying coal tips over it causes a mess, not an explosion like that for oil. It can be transported in a wide variety of modes. It is also a much more flexible fuel. That is why usage of coal grew by 3% last year, more than any other form of energy according to the Statistical Review of World Energy from BP (BP) - Get BP p.l.c. Sponsored ADR Report, the British oil giant.
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It’s to the point where "survival of the fittest" is now the standard. There has been consolidation due to mergers, acquisitions, bankruptcies, etc… in the coal sector. The remaining companies should be in for the long term with demand increasing for the fossil fuel and fewer companies to compete.
What’s the play for long-term investors?
Go with Market Vector Coal for the diversity that an exchange-traded fund provides, and with Peabody Energy as it is tough to go wrong buying the best. As the chart below shows, there is still plenty of upside for each.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates PEABODY ENERGY CORP as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate PEABODY ENERGY CORP (BTU) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 181.1% when compared to the same quarter one year ago, falling from $90.40 million to -$73.30 million.
- The debt-to-equity ratio of 1.50 is relatively high when compared with the industry average, suggesting a need for better debt level management. To add to this, BTU has a quick ratio of 0.63, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- The gross profit margin for PEABODY ENERGY CORP is rather low; currently it is at 16.52%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -4.16% is significantly below that of the industry average.
- In its most recent trading session, BTU has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- PEABODY ENERGY CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, PEABODY ENERGY CORP continued to lose money by earning -$1.12 versus -$1.84 in the prior year. For the next year, the market is expecting a contraction of 2.7% in earnings (-$1.15 versus -$1.12).
- You can view the full analysis from the report here: BTU Ratings Report