Court Decision has King Coal Coming Back
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A recent federal appeals court ruling that rejected the latest effort of the Environmental Protection Agency to limit soot and smog that blows from utility plants across state lines has led to a rally in the coal sector since late July. Peabody Energy (NYSE: BTU), the largest coal company in the United States, is up for the last month of trading. Alpha Natural Resources (NYSE: ANR) has risen more than 10% for the same period. The share price of Arch Coal (NYSE: ACI) is higher by more than one-quarter for the last four weeks of market action. The exchange traded fund for coal, Market Vectors Coal (NYSEMKT: KOL), also increased significantly for the same time segment.
Coal companies certainly need a great deal of assistance in the present market environment. Due to the plunging price of natural gas, many electric plants have replaced coal power with it. The exchange traded fund for natural gas, United States Natural Gas (NYSEMKT: UNG), is down more than 50% for the last 52 weeks of market action. While it has risen in recent trading due to an unusually hot summer resulting in a greater demand for electricity to run air conditioning units, United States Natural Gas is expected to plunge again with another mild winter predicted. At present, the short float for United States Natural Gas is 40.61%, reflecting that expectation among investors. A short float of 5% is considered to be troubling for a security.
Slumping economic growth in China, Japan, India, Russia, Brazil, South Africa and Korea, among other nations, has also pounded away like the legendary John Henry's hammers at the earnings of coal companies. China, Japan, South Korea and India, in that order, are the biggest coal importers in the world.
Imports from abroad do not look to be increasing anytime soon. China, far and away the largest consumer of coal, looks to be settling into a "hard landing" for its economy. That is revealed by its record stockpiles of iron ore in the People's Republic, for which massive quantities of coal are needed to produce. Japan is well into the 21st year of its "Lost Decade" of economic growth for the island nation.
As a result of these factors, the federal appeals court ruling is welcome relief for the coal sector. It is having an immediate impact, too. Luminant, a unit of Energy Future Holdings Corp, the largest power generator in Texas, announced that it would now continue operating two coal-fired power plants. Before the court decision, it had planned to idle the two utility facilities situated east of Dallas.
Even before the federal appeals court action, it was still not wise to bet against King Coal for the long term. Warren Buffett paid $29 billion for Burlington Northern Santa Fe railroad in late 2009, which is among the largest coal haulers in the United States. Electricity flowing to one in every ten American homes is generated from coal carried to power plants by Burlington Northern Santa Fe railroad. In another bet on coal by the Oracle of Omaha, Mid-American Energy, now receiving 45% of its power from coal, was acquired for the portfolio of Berkshire Hathaway.
Even with recent spike in prices and the federal appeals court ruling, coal stocks are still very attractively priced and trading well below recent peaks. The chart below shows how the price-to-sales ratios have plunged over the last five years.
ACI Price / Sales Ratio data by YCharts
This results in coal stocks being very compelling buys. As an example, Peabody Energy is down 48.54% for the last year of market action. Its current price-to-sales ratio is just 6.55. For the future, while a price-to-earnings growth ratio of 1 is considered to be adequate, Peabody Energy's is a very bullish 0.36.
Also bullish for Peabody Energy is the mean analyst rating of 1.70 (1 is Strong Buy with 5 being Strong Sell). Now trading around $22.90 a share, the mean analyst target price for Peabody Energy is $32.75 for over the next year. The recent federal appeals court ruling will surely improve the bullish outlook for Peabody Energy and other coals stocks, as the recent rise in share prices evinces.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.
