Is Coal Worth Looking At?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The coal market hasn't exactly been the bastion of the bulls. Low natural gas prices have decreased America's demand for thermal coal. Yet, others have noted that in the long run natural gas prices will probably inch upward. Upstream drillers have a strong incentive to avoid another supply glut, plunging natural gas to absurdly low prices. Also, the world's growing liquefied natural gas (LNG) infrastructure will help to boost U.S. natural gas and make thermal coal more competitive.
Peabody Energy (NYSE: BTU) is a strong thermal coal producer with mines on both sides of the Pacific. The company is heavily exposed to the Chinese economy as its Australian mines are right next door. China's recent announcement that it is considering banning low quality coal caused a scare for coal exporters, but already China is considering loosening its restrictions. At any rate, the Chinese ban on low quality coal should help Australian miners like Peabody and hurt low quality Indonesian miners.
Peabody's total debt to equity ratio of 1.26 is on the higher end of the scale, but the company's diversified operations make its debt load manageable. Its gross margin of 25.1% is strong, though its EBIT margin of -0.9% needs to rise. Peabody is currently trading at a 2014 forward price to earnings (P/E) ratio around 13, and it is one of the better deals within the industry.
Arch Coal (NYSE: ACI) is another coal miner, and it is opening up a high quality metallurgical mine to diversify its product lines. The company expects that the Leer mine should open in Q4 2013. The high ore grades should provide a significant boost to its bottom line and earnings. Its expected 2014 earnings per share (EPS) of $-0.62 is a significant improvement from its expected 2013 EPS loss of $-1.27.
With a gross margin of 16.3% and a total debt to equity ratio of 1.84, Arch Coal is one of the more questionable coal miners. While it has a quick ratio of 2.2 and looks stable for the time being, it isn't attractive as Peabody.
Cloud Peak Energy (NYSE: CLD) has suffered, as lower prices for Australian coal hurt its export prospects in the Asian markets. Still, the company is a strong low cost producer of U.S. thermal coal with a gross margin of 23.1%. Its established operations in the Powder River Basin give it low margins and close access to the Asian export markets. Overall, Cloud Peak Energy is a great way to invest in cheap U.S. coal reserves without costly legacy assets.
Its debt load is very manageable, with a total debt to equity ratio of 0.83. Its low cost structure has allowed it to post a profit margin of -0.8%, a very strong number considering the current industry challenges.
On a revenue basis, Alpha Natural Resources (NYSE: ANR) is evenly split between the metallurgical and thermal coal markets. Unlike Cloud Peak Energy, Alpha Natural Resources has many assets in the eastern U.S. and an elevated cost structure. Its gross margin of 15.6% is lower than Cloud Peak's, Arch Coal's and Peabody's. Also, China's decreased demand for steel is hurting Alpha Natural Resource's metallurgical business. The company is expected to post an EPS loss of $2.23 in 2013 and $1.54 in 2014.
Even though its total debt to equity ratio of 0.7 is relativity low, the company is best avoided. With high cost mines along the eastern seaboard, its margins are questionable. Its current profit margin of -39.5% is the worst out of the four miners mentioned in this article.
Coal is not a sexy energy source like thorium or natural gas, but it gets the job done. Developing the infrastructure for natural gas is very expense and nations like China and India find it easier to stick with coal. Peabody and Cloud Peak Energy are two good ways to play increasing thermal coal demand, but Peabody's Australian mines make it the better choice. Alpha Natural Resources and Arch Coal are working to improve their operations, but with high cost structures they are best left for another day.
The coal industry in the United States has been in a state of flux since the arrival of a cheaper alternative for energy production: natural gas. Exports are becoming a much bigger part of the domestic coal landscape, and Peabody Energy has deals in place to get its cheaper coal from the Powder River and Illinois basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource — simply click here now to claim your copy today.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!