Cloud Peak Energy Needs to Blow Off Some Steam

NEW YORK ( TheStreet) -- In November, I marveled at the across-the-board cheap valuations of coal stocks. These companies were cheap for a reason, including Cloud Peak Energy ( CLD), which (in November) fell below its reported book value.

Since that article, Cloud Peak's stock price's course has seen no valleys, which pretty much affirms my belief that the only way to consistently make money in commodity-driven industries is to swim against the current. While pundits were beating the drum on TV and print about what a poor industry coal was, Cloud Peak investors took advantage.

Truth be told, I've had my doubts. It's true there are some positive signs that the industry is beginning to rebound. It's still an open question as to whether Cloud Peak is better positioned than Arch Coal (ACI) or Alpha Natural Resources (ANR) to fully capitalize on the rebound.

While I was more than willing to give management the benefit of the doubt that it had done enough to address legitimate operating challenges, there is plenty to prevent me from buying this stock. For instance, last year the company sold roughly 4 million tons of 2013 coal production for less than $10 per ton.

The Street didn't seem to mind; management now had near-term liquidity for other maneuvering. But I didn't believe it made sense to sell such a high volume below cost. Although the company ended up with some cash, they lost money given that cost per ton was going for more than $10 at the time.

In the very next quarter, pundits seemed stunned that the company's earnings-per-share declined 60% year-over-year, while product margins and average cost of coal (per ton) fell 21% and 10%, respectively. Essentially, management got some near-term capital relief in June, only to see the stock/investors pay the price four months later because it missed out on a narrower-than-expected loss.

So I have to wonder where this new optimism is coming from. I haven't seen anything lately from Cloud Peak to suggest that it can dethrone Peabody Energy (BTU), which is expanding aggressively overseas and has done better than its peers to navigate the stagnant domestic market. All told, while I believe this sector has already bottomed, I can't agree with this sudden excitement in Cloud Peak stock.

On Thursday, the Cloud Peak will report results for the fourth quarter and full year. The Street is looking for 24 cents in earnings per share on revenue of $363.5 million, which would represent a year-over-year revenue decline of only 3%. ("Only" because it would be a meaningful sequential improvement from the 12% decline in the October quarter that missed revenue by $10 million.)

The revenue number matters very little here. Given the state of the industry, what investors need to hone in on are operational improvements. This is where the value creation comes in. So what does it matter if revenue comes above expectations but there's no profit to show for it?

Decisions like selling key assets at meaningful losses does little to encourage trust. Investors should also to see if this company can capitalize from the recent recovery in natural gas prices. To what extent will a rebound, even a modest one, trickle down to the bottom line?

Even with the stock's recent rise, the Street is valuing Cloud Peak on the assumption that it will post little to no growth at all. Management remains optimistic, however. The company has already contracted to sell 42 million tons of coal in 2015 (two-thirds of which will be for an average price of close to $14 per ton). Although investors are already buying on that premise, these shares are just too hot for my taste.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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