Can Alpha Natural Resources Beat the Odds and Outperform in 2013?

With shares of Alpha Natural Resources (NYSE:ANR) trading around $10.60, is ANR an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts for the Stock’s Movement: EarningsCoal Mining

ANR will report its fourth-quarter 2012 earnings on February 22, and if the stock’s current volatility is any indicator (beta is sitting at 2.33) the release is bound to generate a flurry of trading activity. To get a head start on the game, analysts are expecting the company to post a loss of $0.53 per share for the quarter, and losses of $1.28 per share for the year.

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For the same quarter last year, analysts were expecting EPS of $0.26, but ANR missed the mark with a loss of $0.07 per share. However, ANR beat third-quarter estimates by 29 cents with a loss of just $0.16 per share.

E = Equity-to-Debt Ratio is Closer to Zero Than its Competition

ANR’s debt-to-equity ratio of 0.59 looks pretty good when compared to its major competitors. Peabody Energy Corp. (NYSE:BTU) currently holds a debt-to-equity ratio of 1.07, while Arch Coal Inc. (NYSE:ACI) sits at 1.45.

It’s also important to consider total debt and total cash on hand, which for ANR is $2.99 billion in total debt, and $549.4 million in cash. Peabody Energy currently holds $6.36 billion in total debt, and $648 million in cash, while Arch Coal carries $4.58 billion in total debt, and $650.11 million in cash.

T = Technicals on the Stock Chart are Strong

As of November 27, ANR’s stock price is 13.02 percent above its 20-day simple moving average, or SMA; 24.24 percent above its 50-day SMA; and 11.56 percent above its 200-day SMA.

Since the beginning of 2013, the stock has been in an upward trend, gaining 8.83 percent this year to date, but has lost 52.2 percent for the past 52-week period.

E = Excellent Poor Performance Relative to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is performing. Struggling against economic headwinds ANR’s operational performance has fallen to the bottom of the pile. The company has an ROE of -45.7 percent, a highly unattractive figure. Arch Coal looks good by comparison with an ROE of -9.48 percent, while Peabody Energy commands the group with an ROE of 14.08 percent.

Operating margins are also critical for stock evaluation. Unfortunately, ANR loses out on this metric as well with an unsustainable operating margin of -46.54 percent. Arch Coal is also in the red with an operating margin of -6.3 percent, while Peabody Energy once again leads the class with a margin of 16.49 percent.

From an ROE and operating margin standpoint, ANR comes out looking like a pretty clear loser. (All eyes on Peabody as a strong coal play?)

T = Trends Support the Industry in which the Company OperatesCoal Mining

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 trading days following the results.

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 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.

Observers who have turned their eyes overseas for growth prospects know that China’s average manufacturing PMI for the past 12 months has been just 49.1, signaling contraction. China’s GDP for 2012 was just 7.5 percent, a far cry from the 9.7 percent seen in 2011.

But China’s December manufacturing PMI register 51.5, and HSBC’s chief economist for Greater China commented on the reading: “Such momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise.”

China’s GDP is expected to grow 8.6 percent in 2013 on the back of heavy infrastructure spending, which could prove to be a boon to struggling coal companies.

Conclusion

ANR is pressing right against a resistance level of around $10 right now. The stock chart is pointing favorably toward an up trend but a breakout is by no means guaranteed. 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.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.