Out of Seven Coal Miners, Only CONSOL Shines

Can the U.S. coal mining industry in be saved? The forces arrayed against coal are formidable: environmental groups hate the stuff, the U.S. Environmental Protection Agency (EPA) has proposed rules that effectively eliminate the construction of new coal-fired power plants, the U.S. Treasury has told the World Bank and other international development banks to refrain from financing new coal plants and the Tennessee Valley Authority (TVA) recently announced that it will retire eight coal-burning plants that generate 3,000 megawatts of electricity because it is too expensive to upgrade them to meet environmental regulations.

It is no wonder then that coal mining stocks have fallen as much as 80% in the past two years, and none shows a better result than a loss of 7%. Even the tiniest bit of good news gives the stocks a positive jolt for a while, but gains have been nearly impossible to maintain. Analysts usually point to one or more of the following four signs that the coal industry is reviving:

1. Demand from Europe is rising.
2. Demand from China is rising.
3. U.S. demand is rising as natural gas prices rise.
4. Production costs are falling.

However none seems sustainable for any extended time and these signs have simply never coalesced into a significant rally.

Perhaps as a result of the very mixed signals on the industry, some coal stocks continue to carry a very high forward multiple while others cannot get a positive reading. We thought a look at these stocks with an eye on that divergence may reveal a concealed diamond in the rough. Here is our take.

CONSOL Energy Inc. (NYSE: CNX) closed at $37.10 a share on Monday, in a 52-week range of $26.25 to $39.23. CONSOL is in the process of turning its business from coal production to natural gas production, having completed the sale of five mines and other assets to a privately held coal miner. The consensus price target for the stock from Thomson Reuters is about $45, giving the stock an upside potential of more than 21%. The 2014 earnings per share estimate is $1.08, and the forward multiple is nearly 34. That is very rich, and even a successful transition to natural gas may not be able to reward such optimistic expectations. The company pays a dividend yield of 1.4%, and its market cap is about $8.5 billion, the largest of any miner in our review.

Peabody Energy Corp. (NYSE: BTU) said Monday morning that it is closing one of its Australian mines, even though Australian mines and their proximity to Asian coal buyers have been one of the industry’s bright spots this past year. Peabody’s shares closed at $19.08 on Monday, in a 52-week range of $14.34 to $28.75. The earnings per share estimate for 2014 is $0.67, and the forward P/E ratio is nearly 28. Based on a consensus target price of $23.90, the stock’s upside potential is 25%. The company’s market cap is $5.1 billion and its dividend yield is 1.8%.

Alpha Natural Resources Inc. (NYSE: ANR) is another company that is selling assets. Alpha announced Monday morning that it will sell a 50% stake in a shale-gas joint venture for $300 million. The company’s stated reason for the sale was “to crystallize the value of these assets sooner than expected.” Translation: we needed the cash. Shares popped about more than 14% on Monday to close at $7.53, in a 52-week range of $4.78 to $10.74. The consensus earnings estimate for 2014 calls for a loss of $1.75 per share, and the company’s forward multiple is negative. The consensus price target on the stock is $7.90, so it is now nearly fully valued. The market cap is about $1.6 billion, and the company does not pay a dividend.

Cloud Peak Energy Inc. (NYSE: CLD) closed at $18.18 Monday, in a 52-week range of $14.25 to $20.56. Cloud Peak has managed to lose only 12% of its stock price over the past two years, mainly due to its access to West Coast ports. The consensus price target for the stock is about $19, giving the stock an upside potential of 5.5%. The 2014 earnings per share estimate is $0.74, and the forward multiple is about 24. The company pays no dividend, and its market cap is about $1.1 billion.

Three other publicly traded coal companies do not have market caps above $1 billion: Walter Energy Inc. (NYSE: WLT), Arch Coal Inc. (NYSE: ACI) and James River Coal Co. (NYSE: JRCC). Arch and James River have lost about 72% and 82%, respectively, of their stock values in the past two years. Walter Energy is down 77%. Not one has a positive earnings estimate for 2014 or a forward multiple above zero. How any of these three can mount a comeback in 2014 is left as an exercise for the reader.

For the coming year, Cloud Peak appears to be nearly fully valued and Alpha Natural has no positive earnings to look forward to. That leaves just CONSOL and Peabody, which post upside potentials of 21% and 25%, respectively. CONSOL’s long-term debt is about half Peabody’s, and analysts at Sterne Agee said on Monday that it expects shares to rise to $60, up 66% from their current price, based on its position as a low-cost coal producer and its upside in the natural gas business. If you cannot resist a coal-mining play, then CONSOL is the better choice, mostly because it is trying to get out of the coal business.