Commodities & Metals
Coal Leaders Now at Huge Selective Discounts to Book Value
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With new Obama-led EPA rules for coal-powered electric utilities out, investors and traders have had yet one more reason to dump their coal stocks. The long and short of the matter is that coal is probably now the most hated sector out of the current administration. The question is when is enough for investors. In fact, some of the key coal companies are trading at deep discounts to their book value.
Now, investors need to consider one thing here. Book value analysis is only one small step in value investing. You can even argue that the book value may not even matter because of the sentiment and because of the expected losses ahead. Also, who would actually buy the coal mining assets in the ground has to come into play. The trick is getting at a franchise value, and this is much more subjective.
A report from Sterne Agee contends that economic, political and legal challenges will emerge to eventually adjust policy. The firm also believes that this aggressive non-legislative rule making could face failure if the judiciary limits the Environmental Protection Agency’s ability to reach beyond the fence of the existing plants to reduce overall emissions.
24/7 Wall St. has reviewed five of the top remaining coal players in America. Each has its own merits and risks alike. We have included a book value, where shares are now versus where they have been, and what the upside to the consensus analyst target from Thomson Reuters is. The caveat on analyst price targets: these may be ratcheting up or down in the coming days based on the news EPA rules.
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Alpha Natural Resources Inc. (NYSE: ANR) has a price-to-book value of 0.18 to 1. Alpha Natural’s market cap is almost $1 billion, and it has no expected P/E due to losses. Shares closed Monday at $3.24, and the 52-week price range is $3.21 to $8.30. With a consensus target price of $5.47 from Thomson Reuters, Alpha has an implied upside of almost 69%. Alpha Natural was a $50 and $60 stock in 2011.
Arch Coal Inc. (NYSE: ACI) posts a 0.36-to-1 price-to-book value ratio, and its market cap is now $730 million, making it now a small cap stock. Its forward P/E is also negative due to losses. Shares closed at $3.45, and the 52-week trading range is $3.44 to $5.37. With a consensus target price of $4.36, Arch has an implied upside of 26.4%. This was a more than $30 stock in 2011. Arch Coal was selected as one of the nine stocks that could potentially double in 2014, although this feels less and less likely at this time.
CONSOL Energy Inc. (NYSE: CNX) posts a 1.99-to-1 price-to-book value, which reflects it being more diversified and more insulated against coal regulation than peers due to its natural gas mix along with coal. CONSOL’s market cap is $10.26 billion, making it the largest company discussed here. Its forward P/E is less than 24, but that earnings per share estimate for 2014 and 2015 is far lower than earnings in 2013. With a consensus target price of $49.50, CONSOL has an implied upside of 10.9%. CONSOL shares closed at $44.62, and the 52-week trading range is $26.25 to $45.57. CONSOL has recovered handily from its lows under $20 in 2012 and 2013, but this was a $55 stock in 2010 and 2011. CONSOL’s website even offers some interesting perspectives here: Roughly two-thirds of America’s electric power needs are provided by coal and natural gas, with coal the leader at nearly 50%. CONSOL coal provides approximately 6.5% of America’s total electricity supply.
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Peabody Energy Corp. (NYSE: BTU) is also above its own book value, with a ratio of 1.1 to 1 as of now. Its market cap is $4.38 billion, and its forward P/E is around 60. Peabody shares closed at $16.14, and the 52-week trading range is $14.34 to $21.28. With a consensus target price of $21.82, Peabody has an implied upside of 35.2%. Peabody shares are still above the lows of 2013, but this was a $70 stock for a brief time in 2011.
Walter Energy Inc. (NYSE: WLT) posts a 0.46-to-1 price-to-book value, and its forward P/E is also negative due to losses. Its market cap is now gutted to a shell of its former self at only $300 million, making it the smallest company reviewed here. Shares closed at $4.56, and the 52-week trading range is $4.53 to $19.50 (ouch). With a consensus target price of $8.75, Walter has an implied upside of 91.9% — if you trust the analyst targets here. Walter Energy shares have slid and slid, and it feels almost sad to say that this was a $100 stock back in 2011.
Stern Agee’s Michael Dudas has chimed in on the matter of coal and EPA regulations. He said about the coal exposure:
We believe Consol Energy remains the best positioned equity within our mining universe to benefit from improved energy pricing and volume trends given its low-cost energy production and excess asset value while Peabody Energy’s leading U.S. thermal market share should eventually help offset current low global met and thermal coal pricing. Certainly, the recent lack of meaningful met coal pricing catalysts during the past few weeks has been the driving pressure on Alpha, Arch, and Walter shares; we believe sentiment, while negative, appears too excessive at current valuation levels.
24/7 Wall St. would again warn its readers that book value analysis is very different from what an outsider may say a company is worth. Some outsiders will say the value of a franchise may be much higher than the stated book value, and others will say that the expected losses in the future will eat up that book value discount.
We would also warn that some are very negative still when it comes to coal. UBS even recently evaluated whether there would be more coal bankruptcies after the one at James River.
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