Is Coal Back? Stocks Poised to Benefit

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With constant talk about renewable energies - or oil -, coal is usually overlooked. Many see coal as a thing of the past. Something that belongs to an archaic turn-of-the-century America, when most all electricity production was based on coal. However, the fact of the matter is that, in the United States, coal is far from being a irrelevant: In 2011, 42% of all electricity generation was coal-based (natural gas and nuclear power came second and third with roughly 20% each, and the rest was divided between renewables and oil). In fact, the United States is the world leader in coal-generated power (China came in a close second). There is, however, a fierce public debate on coal; with supporters claiming coal is "America's power", while opponents citing pollution concerns. At any rate, despite there being a slowdown of coal power plant building, mainly due to regulatory restrictions, coal is still a cornerstone of American energy production.

The following three stocks are big players in the coal industry: Alliance Resource Partners (NASDAQ: ARLP), Natural Resource Partners (NYSE: NRP), and Arch Coal (NYSE: ACI).

Alliance Resource Partners (ARLP)

  • The company produces and markets coal to American utilities and industries. With the economy recovering, energy demand by individual consumers, but most importantly, by industries, should rise, therefore benefiting the company.
  • With regards to valuation, it has an attractive P/E of 10.34x, and an even more attractive forward P/E of 9.50x.
  • Analysts have a consensus price target of $75.75, which implies a 18.36% stock price upside. Analysts are moderately bullish on the stock (with an average recommendation of 2.00/5, with 1 being strong buy and 5 being strong sell).
  • ARL pays an attractive dividend of $4.34/share (that's a yield of 6.78%).
  • My take: ARL is very attractive from a valuation standpoint, is viewed favorably by analysts, and it pays a handsome dividend. This should be a good play on the coal market for 2013.

Natural Resource Partners (NRL)

  • Despite being coal-centered, NRL is also a player in the natural gas business.
  • The company does not currently look as cheap as ARL, as it has a P/E of 17.45x. However, earning estimates for the company are bullish, and it currently trades at a more attractive forward P/E of 12.48x.
  • Analysts are generally bullish toward NRL: They have an average target price of $27.50 (which means there is potential for a 23.1% price rise), and have a moderately positive recommendation on the stock (2.1).
  • It pays a whopping $2.20/share dividend (that's a yield of almost 10%).
  • On Jan 23, shares worth $15M were bought by insider Christopher Cline.
  • My take: The stock is viewed favorably by analysts, pays a very attractive dividend, has had recent and significant insider buying, and is set to benefit from both improvement in the coal and in the natural gas market. It has had a good run so far in 2013 (+20%), and it is likely to edge higher as general economic conditions improve. Furthermore, the fact that the stock is not exclusively a coal play (as it also has an interest in natural gas) should make it a safer bet than the rest if regulatory hurdles were to threaten the profitability of the coal industry this year.

Arch Coal (ACI)

  • Arch Coal is a coal producer.
  • They have no positive P/E ratios as they reported a loss last quarter ($-0.32 in FY 12/12)
  • It pays a small dividend of $0.12/share (yield of 1.66%).
  • Analysts are somewhat neutral on the stock (avg. rec of 2.70). The most recent analysis, however, have all been bullish, and the current average price target on the stock is $8.98, which implies that the stock has room for a 24% upside.

My take: Despite seeming to be the least favored stock of the three, it should definitely benefit from the general improvement in coal markets. It is not as diversified as NRP, not as attractive valuation-wise as ARL, and certainly much weaker with regards to

<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Avg Price Target (Implied Upside %)</strong></td> <td><strong>Dividend Yield</strong></td> <td><strong>Avg Analyst Rec.</strong></td> </tr> <tr> <td><strong>ARL</strong></td> <td>10.34</td> <td>9.50</td> <td>$75.75 (+18.36%)</td> <td>6.78%</td> <td>2.00</td> </tr> <tr> <td><strong>NRP</strong></td> <td>17.45</td> <td>12.48</td> <td>$27.50 (+23.1%)</td> <td>9.85%</td> <td>2.10</td> </tr> <tr> <td><strong>ACI</strong></td> <td>-</td> <td>-</td> <td>$8.98 (+24.03%)</td> <td>1.66%</td> <td>2.70</td> </tr> <tr> <td><em><strong>Edge</strong></em></td> <td><em><strong>ARL</strong></em></td> <td><em><strong>ARL</strong></em></td> <td><em><strong>ACI</strong></em></td> <td><em><strong>NRP</strong></em></td> <td><em><strong>ARL</strong></em></td> </tr> </tbody> </table>

 Bottom Line

The coal industry is expected to recover this year (and should rise steadily until 2017, according to the International Energy Agency), which means that all three stocks are poised to benefit. All three of them look relatively attractive. However, I believe NRP has perhaps an overall edge, mainly due to the very attractive dividend yields, smart diversification, and recent significant insider buying.


wheckster has no position in any stocks mentioned. The Motley Fool recommends 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!

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