This Stock May Be The Best Coal Investment of 2013
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Alpha Natural Resources (NYSE: ANR) is down over 50% year-to-date on the back of lower than expected coal demand and depressed mineral prices. Being the third largest coal producer in the U.S., Alpha is still sometimes overlooked. Sales were up 80% in 2011, thanks in part to its acquisition of Massey Energy, but revenues are only expected to be up 2% in 2012. Driving the stock down has also been a decline in coal volumes, which were in part a product of high stockpiles at utility companies due to the ongoing natural gas switchover.
Alpha has some of the strongest expected sales growth of the major coal stocks for 2013; the sell-side expects it to grow top line revenues by 6%. Billionaire Ken Griffin - founder of Citadel Investment Group - was one of Alpha's biggest investors last quarter (see Ken Griffin's newest picks).
In general, the vast amount of production cuts by U.S. coal companies should help reduce the stockpile buildup at utilities, and set the industry up for higher prices in 2013. The expected rise in natural gas prices should be a near-term catalyst as well. We believe that Alpha should trade more in line – currently at only 0.3x sales – with its thermal coal peers Arch and Alliance. We are also encouraged by the coal company’s 5-year expected growth rate that comes in at 5%, which is second to only Walter Energy.
Peabody Energy (NYSE: BTU), like many of its coal brethren, expects flat sales growth in 2013, following a 17% increase in 2012. Peabody has a robust operating scale, giving the coal company an advantage in relation to its peers. Part of this includes the company’s international exposure. Demand and pricing will primarily be driven by increased demand from China, in addition to a more bullish global steel environment. George Soros was one of Peabody's biggest hedge fund owners last quarter (check out George Soros' new picks).
What about the remaining competitors in this space?
Arch Coal (NYSE: ACI) is expected to post flat growth in sales for both 2012 and 2013. Arch’s 2011 acquisition of International Coal has helped the coal company gain more exposure to higher-priced markets – including the Appalachian – and also boosted exposure to metallurgical coal. Arch has seen the same pressures as Alpha, which puts the stock in similar valuation territory at 0.35x sales, compared to Alpha’s 0.3x multiple. The big difference, though, is Arch’s 5-year expected earnings growth rate, which comes in at a negative 3% CAGR.
Walter Energy (NYSE: WLT) is one of the U.S.’s top producers and exporters of coal to the steel industry. The company is facing double-edged pressures, from compressed coal prices and a global slowdown that has put steel demand in bearish territory. Still, as mentioned above, we expect the steel market to pick up a bit next year. It is also expected to see profitability pressures in the interim thanks to rising coal stockpiles. In order to hedge the slowdown, Walter expects to cut CapEx to $220 million in 2013, down from $400 million in 2012. Despite being down over 40% year to date, Walter still sports a forward P/E of 35x.
Alliance Resource Partners (NASDAQ: ARLP) is another diversified producer of coal in the U.S. Alliance is focused on providing coal to major U.S. utility companies. This exposure leads us to remain cautious, as the company missed earnings by 50% last quarter, and trades the highest of the five stocks listed here on a P/S basis at 1.1x. Moreover, Alliance is not only one of the richest coal stocks on a valuation basis, but it also has one of the lowest expected earnings growth rates, with a 5-year EPS CAGR of 1.5%. Billionaire Jim Simons upped his stake almost 60% last quarter (see Jim Simons' top picks).
To recap: Alpha Natural Resources is down the most (-54.6%) of the five coal stocks year to date, with Arch in close second (-51.6%). Still, we believe that Alpha has the most upside potential.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. 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!