Coal Stocks: The New Solar Sector or a Value Choice? (BTU, CNX, WLT, ANR, ACI, JRCC, PCX, CLD, KOL)

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Coal stocks are taking another hit today, although there has been a slight bounce in the late morning. Buyers must hold the opinion that the stocks have reached or nearly reached a bottom.

Certainly the coal companies must hope so. Over the past 12 months the best performing coal company is down -28% while the two worst have lost nearly 90% of their value. Shades of last year’s plunge in the solar sector!

One can find any number of market pundits urging investors to buy in at these prices, and hold on for the long term. Coal prices, they say, must rise again because nearly all US power plants that can convert to natural gas have already done so. The second reason to buy is based on expectations that demand for metallurgical coal used in making steel will pick up in China.

We’ve looked at eight coal miners to see what value there might be left in the sector: Peabody Energy Corp. (NYSE: BTU), Consol Energy Inc. (NYSE: CNX), Walter Energy Inc. (NYSE: WLT), Alpha Natural Resources Inc. (NYSE: ANR), Arch Coal Inc. (NYSE: ACI), James River Coal Co. (NASDAQ: JRCC), Patriot Coal Corp. (NYSE: PCX), and Cloud Peak Energy Inc. (NYSE: CLD).

Peabody Energy Corp. (NYSE: BTU) traded at $22.87 and has a market value of around $6 billion. The consensus target price from Thomson Reuters is $43.17 and the 52-week range is $22.18-$61.85 (the low was set today). Peabody has a dividend yield of 1.4%. The implied upside to the consensus target is 88%, and we note that the target is well below the 52-week high.

Consol Energy Inc. (NYSE: CNX) traded at $28.00 and has a market value of around $6.4 billion. The consensus target price from Thomson Reuters is $44.04 and the 52-week range is $27.80-$55.02. Consol has a dividend yield of 1.7%. The implied upside to the consensus target is 57%, and we note again that the target is below the 52-week high.

Walter Energy Inc. (NYSE: WLT) traded at $47.53 and has a market value of around $3 billion. The consensus target price from Thomson Reuters is $80.81 and the 52-week range is $47.12-132.38. Walter Energy has a dividend yield of 1%. The implied upside to the consensus target is 70%, and we note again that the target is well below the 52-week high.

Alpha Natural Resources Inc. (NYSE: ANR) traded at $10.32 and has a market value of around $2.9 billion. The consensus target price from Thomson Reuters is $21.26 and the 52-week range is $10.05-$51.88. Alpha does not pay a dividend. The implied upside to the consensus target is 106%, and we note again that the target is far below the 52-week high.

Arch Coal Inc. (NYSE: ACI) traded at $6.24 and has a market value of around $1.3 billion. The consensus target price from Thomson Reuters is $12.02 and the 52-week range is $6.08-$28.76 (the low was set today). Arch has a dividend yield of 1.7%. The implied upside to the consensus target is 93%, and we note again that the target is far below the 52-week high.

James River Coal Corp. (NASDAQ: JRCC) traded at $2.40 and has a market value of around $84 million. The consensus target price from Thomson Reuters is $5.57 and the 52-week range is $2.25-$22.00 (the low was set today). James River does not pay a dividend. The implied upside to the consensus target is 132%, and we note again that the target is far below the 52-week high.

Patriot Coal Corp. (NYSE: PCX) traded at $2.31 and has a market value of around $209 million. The consensus target price from Thomson Reuters is $5.59 and the 52-week range is $1.36-$24.99. Patriot does not pay a dividend. The implied upside to the consensus target is 142%, and we note again that the target is well below the 52-week high.

Cloud Peak Energy Inc. (NYSE: CLD) traded at $15.09 and has a market value of around $905 million. The consensus target price from Thomson Reuters is $20.46 and the 52-week range is $13.65-$24.34. Cloud Peak does not pay a dividend. The implied upside to the consensus target is 36%, and we note again that the target is below the 52-week high.

For comparison the Market Vectors Coal ETF (AMEX: KOL) is trading down about -1.3% today at $24.46 after posting a new 52-week low of $24.16 earlier. The previous range was $24.43-$50.62.

Natural gas prices are down again today at around $2.34/thousand cubic feet. Depending on domestic US prices for gas to rise and boost coal consumption — and prices — is not a strategy. It’s wishful thinking. It may happen, but that day could be a very long ways off.

Cloud Peak, with a potential upside of 36%, may be a good choice because virtually all of its reserves are in the Powder River Basin and the company has access to West Coast terminals to ship its production to Asia. Japan, where nuclear power generation is being replaced with coal at least temporarily, is a big buyer, as is China.

The catch is that prices remain low and Asian stockpiles are high. The outlook for the next three months is that prices will rise as China rebuilds the inventories of metallurgical coal that the country is currently running down.

That’s especially good news for Peabody, which owns met coal reserves in Australia thanks to last year’s acquisition of Macarthur Coal. Peabody got 39% of revenues from Australian mines in 2011 on only 11% of the company’s total sales volume. Provided that Peabody can control costs and that prices improve, the company may be the best bet to provide a return by the end of the year. And unlike Cloud Peak, Peabody pays a dividend yield of 1.4% — not grand, but better than nothing.

Paul Ausick