T = Trends Support the Industry in which the Company Operates
Earlier in November, analysts at Goldman Sachs warned investors not to buy the coal dip. Coal stocks tumbled out of speculative inflation after the election, exemplified by companies like James River Coal Co. (NASDAQ:JRCC) losing 37 percent of their stock price in the five preceding trading days.
Tremendous volatility in the coal market is nothing new but the price action over the past few months clearly indicates that the market is unsure what the real value of coal companies are and what the future holds for them.
The analysts at Goldman pointed at four major, short-term issues facing the U.S. coal industry: declining thermal coal demand as plants retire heading into 2015 and regulations prevent the opening of new plants; export competition from Australia and China; the still-depressed global economy burdening already over-taxed balance sheets; and the blunt reality that many coal and iron ore reserves in the U.S. are being dug out and coal seams are becoming more difficult to access.
The effect of natural gas prices on coal has been well documented, and the surge in production capacity and steep drop in prices in the U.S. has wreaked havoc on the coal industry. But in the face of economic headwinds and a shifting energy mix smart coal companies will emerge leaner, smarter, and (hopefully) ready to capitalize on a 2013 price recovery.
That recovery will no doubt be predicated on demand from economies like China and India. China is spending hundreds of billions of dollars on infrastructure and will be likely start demanding huge amounts of both metallurgical and thermal coal. Peabody energy expects global coal demand to grow 12.6 percent through 2016 with 42 percent of the new demand coming from China. Total coal use is expected to grow 50 percent from its current levels by 2035, according to the World Coal Association.
ANR squeaked through the Goldman analysis with a “neutral” rating. The company had some brutal quarters in 2011, and while 2012 looks positive with $7 billion in revenue and expected EPS of $1.57, analyst consensus puts 2013 at an EPS loss of $1.35 while revenue drops 17.5 percent to $5.78 billion. Still, if there’s room to grow in the coal industry, ANR could be one of the companies that does it. It obviously has to contend with Peabody and the other major coal players, but the company is by no means down for the count.
Because of this, and the metrics above, Alpha Natural Resources is a WAIT AND SEE. Putting your money in ANR right now means assuming a large amount of risk — a safer bet would be to look for stronger, less volatile buys with greater upside. But long-term coal bulls looking to buy cheap and profit on a speculated 2013 recovery could see value here.
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