Coal Industry Stock Outlook - February 2017

It is a well-documented fact that the U.S. Coal industry has been facing challenges from the stringent environmental regulations for the last few years. Former U.S. President Obama’s introduction of Clean Power Plan made things worse for the coal industry. With the policy’s initiation, coal as a fuel source was pushed back further by increasing usage of natural gas and renewable energy sources to produce electricity.

With these factors setting the backdrop for the Presidential elections, the selection of the new U.S. President became a crucial point for the coal industry. While Hillary Clinton wanted to carry on the legacy of Obama, Donald Trump wanted to revive the coal industry and relax the regulations which were hurting the prospects of the industry.

During Trump’s election campaign, he had vowed to lower the regulatory pressure on domestic manufacturers and suggested increased investment in energy infrastructure. Now with President Trump at the helm of the country, the coal industry is bound to get a boost if the new administration indeed starts working on these lines. Further, the increased demand will keep coal-based utilities operational much longer than expected earlier.

Even with coal’s waning share in the energy generation mix, the fact remains that it still holds a prominent place and will continue to do so for the next few decades.

Coal is currently mined in more than 50% of U.S. states. The top five coal-producing states – Wyoming (40% of the total), West Virginia (11%), Kentucky (8%), Illinois (6%) and Pennsylvania (6%) – contribute the major share of the total coal production of the country, per reports from the U.S. Energy Information Administration (EIA).

Unfortunately, all major U.S. coal producers have been affected by the drastic fall in demand and consequently the prices dipped. Prices of major coal companies have taken a beating, as a result one of the largest coal company Peabody Energy had to file for bankruptcy and was delisted. However, another coal company, Arch Coal Inc. (ARCH) successfully completed its financial restructuring and emerged from bankruptcy as a reorganized company on Oct 5, 2016, within nine months after filing for Chapter 11.

As per a current release of EIA U.S. coal production touched its lowest point since 1978 in 2016. However, EIA expects coal-fueled electricity generation to contribute to 3% increase in coal production in 2017. Further, coal production is anticipated to increase by 1% in 2018. This is ample evidence of the fact that coal continues to occupy an important position in the fuel mix for electricity generation and is expected to hold the place for next few decades.

Coal and its various byproducts also find use in the industrial sector, underscoring its manifold advantages. However, unchecked usage of this fossil fuel has raised concerns in all quarters. The primary cause of concern related to coal is global warming caused by the emission of greenhouse gases.

Zacks Industry Rank: Positive Outlook

The Zacks Industry Rank, which relies on the same estimate revision methodology that drives the Zacks Rank for stocks, currently puts the coal industry at 65 out of 258 industries in our expanded industry classification. This places the industry in the top one-third among all industries, corresponding to a positive outlook.

The way to look at the complete list of 258 industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third of the list (Zacks Industry Rank of #86 to #169) is neutral while the outlook for the bottom one-third (Zacks Industry Rank #170 and higher) is negative. For more details kindly read our Zacks Industry Rank classification.

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to forecast stock prices, particularly over the short term (1 to 3 months).

Of the 17 coal companies presently in our coverage, three stocks sport a Zacks Rank #1 (Strong Buy) and one carries a Zacks Rank #2 (Buy).

Arch Coal, which came out of bankruptcy, sports a Zacks Rank #1 and also surpassed fourth-quarter estimates by a whopping 5,400%. Its 2017 estimate of $8.66 moved up by 40.8%, while its 2018 estimate of $6.85 moved up by 108.2% in last 30 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Twelve stocks in the group carry a Zacks Rank #3 (Hold) and one each carry a Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell).

Coal Industry Offers Some Upside

The valuation of the industry at present looks attractive. The industry is currently trading at 12.64x P/E multiple. This is quite cheap when compared to its own traded multiple (trading much lower than its high end of 44.84x and median of 25.01x) in the last twelve months as well as S&P 500 (18.39x).

In addition, coal industry has returned much higher than the S&P 500 Index, in the last twelve month period. Shares of the industry have witnessed an increase of 154.3% compared with S&P 500 Index’s gain of 23.9% in the same period.

Earnings Review & Outlook

We are in the thick of fourth-quarter earnings season, with results on board from 358 S&P 500 members (as of Feb 10) that combined account for almost 71.6% of the index’s total market capitalization.

For the fourth-quarter as a whole, combining the actual results from the 358 S&P 500 members that have reported with estimates for the still-to-come 142 companies, total earnings are expected to be up +7.5% from the same period last year on +3.9% higher revenues.

At present out of the 17 coal companies in our coverage universe, seven have reported fourth-quarter earnings results. Out of the seven releases, four companies, or 57.1%, reported a positive earnings surprise while the other three missed earnings expectations.

Alliance Resource Partners, L.P. (ARLP) currently sports a Zacks Rank #1 surpassed fourth-quarter estimates by 51.2%. Its 2017 estimate of $2.70 moved up by 50.8%, while its 2018 estimate of $2.54 moved up by 36.5% in last 30 days.

CONSOL Energy (CNX) currently carries a Zacks Rank #2 surpassed fourth-quarter estimates by 100%. Its 2017 estimate of 55 cents moved up by 266.7%, while its 2018 estimate of $1.15 moved up by 88.5% in last 30 days.

SunCoke Energy (SXCP), a Zacks Rank #5 stock, missed earnings expectations in the fourth quarter by 24.27%. Its 2017 estimate of $1.78 moved down by 11.4%, while its 2018 estimate of $1.61 moved down by 10.1% in last 30 days.

In response to weak coal market fundamentals, the companies have resorted to stringent measures in a bid to improve their financial performance. Miners have taken initiatives to cut costs while engaging in tactful expenditures to ensure coal-mining safety. Further, high-cost coal mines are being shuttered while operations are moved to low-cost regions.

Longwall coal mining techniques are also having a positive impact on production. The marketing teams of coal companies have also been working hard to secure new contracts and renew existing long-term contracts.

For a detailed look at the fourth-quarter earnings outlook for the different sectors in our coverage, please check our weekly Earnings Preview report

Bottom Line

Undoubtedly, coal stocks are suffering and some presume they won’t survive in the long run. Loads of negative factors are weighing down coal stocks, but do these companies have the resources to fight back successfully? We know for a fact that coal reserves at the current pace of production and consumption will last longer than all other fossil fuel resources.

Unlike renewables like wind and solar that rely on nature’s whims for the production of energy, coal-based power plants provide stability to performance of the grid. Further, coal is still far cheaper than other fuel sources.

The new President no doubt has brought in some hope for this sinking industry. However, the new U.S. administration has yet to act on the promises made during the election campaign. It is yet to be seen whether the damage done to the coal industry could be undone in the next few years so that it can regain some of its lost glory.

Admittedly, coal has a long list of drawbacks. Even so, coal will still account for nearly 30% of the electricity produced in the U.S. in 2016 – not a bad achievement for an industry that has been under tremendous pressure from cheap natural gas and booming alternative energy sources.

Further, the EIA forecasted that U.S. coal production will increase year over year in 2017 and 2018, an encouraging sign for coal investors. We still believe coal’s cost advantage and wide availability in worldwide make it a widely accepted source of power generation.

 

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SunCoke Energy Partners, L.P. (SXCP): Free Stock Analysis Report
 
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