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It is a well-documented fact that the U.S. Coal industry has been challenged by stringent environmental regulations for the last few years. Former 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.

However, the condition of the coal industry has started to change for the better after the election of the new President. Donald Trump wants to revive the coal industry and relax regulations that are hurting its prospects. He has started to act on his pre-election promises and taken measures to repeal the Climate Power Plan. Moreover, Trump has also walked out of the Paris Climate Agreement.

The Climate Power Plan and Paris agreement have the same objective of lowering emission levels. Coal usage to generate electricity and in other heavy manufacturing industries are the primary sources of greenhouse gas emissions. No doubt we will see extended use of coal in different industries, which will help coal companies to sail through the difficult times.

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 prices have dipped. However, demand for coal is rising again due to helpful legislation and hike in natural gas prices. Revival of demand from China is also going to have a positive impact on overall demand for coal as source of energy.

In the fourth quarter of 2016, we saw Arch Coal Inc. ARCH successfully completing its financial restructuring and resuming trade on the exchange. Following the same path, we saw Peabody Energy (BTU - Free Report) successfully completing its financial restructuring and trading again from Apr 2017.

As per a recent release from EIA, U.S. coal production touched its lowest point since 1978 in 2016. However, EIA expects that given the gradual revival in demand and export of coal, U.S. coal production to improve by 4.7% and 1.5% year over year in 2017 and 2018, respectively. EIA expects an increase in U.S. coal exports to contribute to a 5% rise in coal production in 2017. The likely growth in coal-fired electricity generation should lead to an additional 1% increase in coal production in 2018.

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: Negative 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 193 out of 258 industries in our expanded industry classification. This places the industry in the bottom-third among all industries, corresponding to a negative outlook. However, we expect this industry outlook to change as President Trump’s decision to walk out of the Paris Climate agreement will have a positive impact on the coal industry.

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 20 coal companies presently in our coverage, two stocks sport a Zacks Rank #1 (Strong Buy) and one stock carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

Apart from President Trump’s decision to move out from Paris Climate agreement, more good news for the coal industry loyalist, similar to Arch Coal, Peabody Energy also came out of bankruptcy and delivered a positive earnings surprise of 245.18% in the first quarter.

Among the remaining coal companies in the space, 10 carry a Zacks Rank #3 (Hold), five carry a Zacks Rank #4 (Sell) and two have a 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 12.12x P/E multiple. This is quite cheap when compared to its own traded multiple (trading much lower than its high end of 61.00x and median of 31.88x) in the last 12 months as well as the S&P 500 (19.29x).

In addition, the coal industry has returned much higher than the S&P 500 Index in the 12-month period. Shares of the industry have witnessed an increase of 39.2% compared with the S&P 500 Index’s gain of 15.2% in the same period.

Earnings Review & Outlook

Out of the 20 coal companies in our coverage, 16 have come up with first-quarter earnings results. Out of the 16 releases, 11 companies, or 68.8%, delivered a positive earnings surprise while the other five missed earnings expectations.

Alliance Holdings GP, L.P. (AHGP - Free Report) currently having a Zacks Rank #2 surpassed first-quarter estimates by 13.58%. Its 2017 estimate has moved up by 13.7% to $3.16, while its 2018 estimate has moved up by 7.8% to $2.91 in the last 90 days. Its unit price has also gained 1.85% over the same time period.

Alliance Resource Partners, L.P. (ARLP - Free Report) ,currently carrying a Zacks Rank #3 (Hold), surpassed first-quarter estimates by 42.86%. Its 2017 estimate has moved up by 20.4% to $3.25 in the last 90 days. Its unit price has also gained 1.42% over the same time period.

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.

The positive developments, thanks to supportive legislations and revival of global prices will boost the performance of the coal stock at least in near future if not over a longer period of time.

For a detailed earnings outlook for the different sectors in our coverage, please check our weekly Earnings Outlook report.

Bottom Line

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. Further, coal is still far cheaper than other fuel sources.

The new President no doubt has brought in some hope for this sinking industry. Plus, big names coming out of bankruptcy are indicating a gradual turnaround of the coal group. Even though the damage done to this industry has yet to be compensated fully, the positive changes are already noticeable.

Even with drawbacks, 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 natural gas and booming alternative energy sources.

Further, the EIA has forecast that U.S. coal production will increase year over year in 2017 and 2018. This is an encouraging sign for coal investors. We still believe that coal’s cost advantage and worldwide availability make it more commonly accepted source of power generation.

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