Declining Oil Prices Increase the Appeal of Coal Stocks
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When oil prices fall, those for coal plummet.
For the last year, the exchange traded fund for oil, United States Oil (NYSEMKT: USO) is down by 17.20%. The exchange traded fund for coal, Market Vectors Coal (NYSEMKT: KOL), has plunged by 48.55% over the same time frame.
While coal is more abundant, oil is the fossil fuel that is the most efficient to produce and still the most effective form of powering vehicles and providing energy for mass usage. But the demand for coal is great and will only increase in the future when the global economy recovers. According to the US Energy Information Administration, coal usage will increase by more than one-third over the next two decades. By far, the great majority of the demand will be in Asia. As a result, coal stocks such as Peabody Cola (NYSE: BTU) and Alpha Natural Resources (NYSE: ANR) have a great deal to offer for growth, income and value investing.
Peabody Energy is not only the largest coal producer in the United States, it is also the best positioned for global growth as it also has operations in Australia. Peabody has a number of projects in China, Indonesia and Mongolia. Year to date, Peabody Energy is down by 24.53%.
As a result, Peabody Energy has a very attractive valuation. The price-to-sales ratio is just 0.82. With a price-to-earnings growth ratio of 0.44; future growth is trading at a deep discount. Present growth is strong as earnings-per-share are up 28.04% for this year and projected to grow by 33.08% for next year. For dividend income investors, there is a 1.37% yield. While hardly compelling, with a payout ratio of 9.09%, there seems to be plenty of room for dividend growth in the future.
Alpha Natural Resources is increasing its exports to China and India, two of the most promising markets for coal in the future. At current price levels, the stock is very undervalued. The price-to-book ratio for Alpha Natural Resources is only 0.26. That means that the assets of the company are priced at about one-quarter value in the share price. The price-to-sales ratio is just 0.24. On a quarterly basis, sales growth is up 71.10% for Alpha Natural Resources.
The growth potential for coal and the upside for the share price of Alpha Natural Resources and Peabody Energy is manifested by the six proposals for new coal export terminals on the Pacific Northwest Coast. At present, there is only one in British Columbia. The purchase of Sante Fe Burlington Northern by Warren Buffett for the portfolio of Berkshire Hathaway (NYSE: BRK-A) is another bullish sign as trains are the primary means of transport for coal to markets, both foreign and domestic.
The professional investor community is bullish on Apha Natural Resources and Peabody. Each has a high level of institutional ownership. When institutional investors, such as private equity groups or mutual funds, the classic "smart money," buy it is an imprimatur of desirability for a stock as they are widely courted and have deep research resources. Alpha Natural Resources has institutional ownership of over 80%. For Peabody Energy, it is over 75%.
The analyst community is also bullish on the propspects for Peabody Energy and Alpha Natural Resources. Now trading around $8.00 a share, the mean analyst target price for Alpha Natural Resources over the next year is $19.74. For Peabody Energy, now about $23.30 a share, over the next year the mean analyst target price is $43.40.
What makes the analyst community so bullish for coal stocks in the United States is the increasing demand overseas, particulary in China and India. Eventually, crude oil prices will rise again, making coal even more attractive as countries move to decrease the dependency on costly imported petroleum. Energy analyst Gregor Macdonald summed this up with, "In the same way that falling US oil consumption has freed up global supply, US declining coal demand is freeing up production for export. Last year marked a 20-year high in US coal exports. Demand for coal in the developing world remains gargantuan. The global coal juggernaut rolls onward.”
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