Commodities & Metals

Coal Leaders Now at Huge Selective Discounts to Book Value

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.