Did James River Coal Deserve an Upgrade?

James River Coal Co. (NASDAQ:JRCC) has led the coal industry in volatility over the last few months. The company’s stock price climbed from $1.71 per share on July 25 to $5.43 per share on October 23, an incredible 217.5 percent increase. Since then, shares have come down over 48 percent to under $3 per share.

Tremendous swings in the price of coal stocks are nothing new with the future of the coal industry being hotly debated. James River, for its part, has been trekking upwards since November 16, posting over 12-percent gains on November 26 after landing an upgrade from Raymond James and a price target of $3 per share.

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CHEAT SHEET Analysis: Trends Support the Industry in which James River Operates

While its position relative to peers will give it an edge in the event of a market recovery, what will give bulls a reason to charge will be a rally in natural gas prices. Coal stocks are going nowhere fast if natural gas prices remain low in North America and the global economy suppresses overseas demand.

Data from the U.S. Energy Information Administration show that the wellhead price for natural gas has been increasing since April, and has come up over 51 percent through August.

Why is James River an Outperform in such a crazy market?

James River was upgraded based on “valuation, ample liquidity, and expectations for a natural gas rally.”

The company clocks in with a price-to-sales ratio of 0.07 and a price-to-book ratio of 0.24, compared to competitors Alpha Natural Resources (NYSE:ANR) at a P/S of 0.22 and a P/B of 0/31, and Arch Coal (NYSE:ACI) with a P/S of 0.32, and a P/B of 0.44.

If the company’s slump is in fact temporary and a coal rebound is coming, then James River does look cheap. James River also leads its peers with a quick ratio of 1.96, compared to ACI at 1.53, and ANR at 1.21.

How Will This Affect James River’s Stock?

Investors clearly jumped on the upgrade, but the stock has seen larger rallies collapse. Despite a lot of pessimistic news about the industry, major coal companies are not preparing to close shop. Instead, coal looks like it is preparing to settle into a new niche as a smaller but still critical portion of the energy mix.

There’s no doubt that James River will remain volatile going into the future, but the target of $3 per share seems highly reasonable, falling on the low-end of the mean target of $3.25 per share. When prices stabilizing, it would be unsurprising to see James River find a home around this price level.

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