Is Alpha Natural Resources a Dangerous Investment?

With shares of Alpha Natural Resources (NYSE:ANR) trading at around $7.13, is ANR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Alpha Natural Resources operates 107 mines and 26 coal preparation facilities in Northern and Central Appalachia (not such a good thing at the moment) and Powder River Basin. It has 4.6 billion tons of proven and probable coal reserves. That’s impressive, but where’s the demand? We’ll get to that in a moment. First, it should be stated that Alpha Natural Resources serves electric utilities, steel and coke producers, industrial customers, and energy traders and brokers.

As far as demand for metallurgical coal, it can be found in places like India, China, Germany, and Japan. Alpha Natural Resources is the number one metallurgical coal supplier in the world. Therefore, if demand is high, potential is excellent. The problem is that demand isn’t strong in enough places, which will be noted in the following list of negatives for Alpha Natural Resources:

  • Weak demand in the United States
  • Weak margins
  • Decline in revenue in 2012
  • Decline in EPS in 2011 and 2012
  • Decline in quarterly revenue on year-over-year and sequential basis
  • Glut in steel
  • Low coal prices
  • Stock smashed to smithereens in 2008

That’s not a list that would make any potential investor excited about getting involved. It should also be noted that Alpha Natural Resources has stopped production at several mines in the Appalachian region in order to cut costs. This can be looked at as a positive or a negative. It will hurt potential growth, but help the bottom line.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Alpha Natural Resources, Arch Coal Inc. (NYSE:ACI), and Peabody Energy Corp. (NYSE:BTU). Alpha Natural Resources has a market cap of $1.55 billion, Arch Coal has a market cap of $997.60 million, and Peabody Energy has a market cap of $5.08 billion.

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ANR

ACI

BTU

Trailing   P/E

N/A

N/A

N/A

Forward   P/E

N/A

N/A

11.44

Profit   Margin

-34.94%

-16.74%

-10.02%

ROE

-39.49%

-21.22%

-12.40%

Operating   Cash Flow

$518.42 Million

$332.80 Million

 N/A

Dividend   Yield

N/A

2.50%

1.80%

Short   Position

N/A

14.30%

3.90%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal        

The debt-to-equity ratio for Alpha Natural Resources is close to the industry average of 0.70.

Debt-To-Equity

Cash

Long-Term Debt

ANR

0.68

$1.04 Billion

$3.39 Billion

ACI

1.79

$1.02 Billion

$5.12 Billion

BTU

1.25

$629.50 Million

$6.15 Billion

 

T = Technicals Are Weak       

Alpha Natural Resources has performed poorly over the past two years. This has been during a raging bull market.

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1 Month

Year-To-Date

1 Year

3 Year

ANR

-14.22%

-26.90%

-55.91%

-86.03%

ACI

-7.65%

-32.00%

-46.32%

-80.77%

BTU

-9.19%

-28.80%

-35.77%

-58.38%

 

At $7.13, Alpha Natural Resources is trading below all its averages.

50-Day   SMA

8.14

100-Day   SMA

8.58

200-Day   SMA

7.97

 

E = Earnings Have Been Weak                             

Earnings have continued to weaken over the past two years. Revenue seems to have peaked in 2011.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

2.47

2.50

3.92

7.11

6.98

Diluted   EPS ($)

2.36

0.63

0.79

-4.06

-11.06

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and an improvement in earnings. Revenue and earnings both declined on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

2.07

1.94

1.85

1.63

1.56

Diluted   EPS ($)

-4.43

-0.13

-10.14

-0.21

-0.58

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Global demand is somewhat strong, but domestic demand is weak. On an international level, natural gas is too expensive and nuclear is deemed to be too dangerous. However, the global economy as a whole doesn’t look promising at the moment, which has the potential to lead to decreased demand.

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Conclusion

Nobody knows for sure if the natural gas boom is sustainable. If so, then coal will be pronounced dead in the United States. However, coal will still have international potential. If natural gas fails, then coal will return to the domestic market. On the surface, it seems like a win/win for coal, but that’s not the case. Basic materials in general are very sensitive to global economic downturns, which makes downside risk high. There aren’t enough catalysts to make this a quality investment right now. The near future looks bleak.

Alpha Natural Resources is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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