Back to top

Image: Bigstock

5 Coal Stocks to Watch for Gains in a Prospering Industry

Read MoreHide Full Article

The Zacks Coal industry stocks have staged a rebound courtesy of global demand after the pandemic-led lockdowns and surging natural gas prices.  Coal was gradually losing ground to natural gas and clean alternate energy sources due to concerns about emission.  However, improving coal prices and demand have been boosting the profit levels of coal operators over the last quarter and this trend is expected to continue for the next few years.  With increased vaccinations and global economic activity, electricity demand is rising and utility operators are buying more coal to step up production.

Stocks like Peabody Energy Corporation (BTU - Free Report) with exposure in thermal coal and metallurgical (met) coal, are well poised to benefit from the revival in the domestic and international coal markets. As global steel production continues to improve from the pandemic-induced lows, other coal stocks that are poised to benefit from an expected increase in U.S. met coal export in 2021 are ARCH Resources Inc. (ARCH - Free Report) , Warrior Met Coal Inc. (HCC - Free Report) , CONSOL Energy Inc. (CEIX - Free Report) , and Ramaco Resources (METC - Free Report) .  Steel production is expected to increase in the European and Asian countries in the 2021-2022 timeframe.


About the Industry

The Zacks Coal industry comprises companies that are involved in the discovery and mining of coal. Coal is mined by either the opencast or the underground method. Coal is valued for its energy content and used worldwide to generate electricity as well as in steel and cement manufacturing. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many more years. Five states of the United States contribute nearly 70% of yearly production and 60% of coal production from surface mining. Per EIA, the coal industry may benefit from the rise in natural gas prices in the United States in 2021. This would result in additional demand for coal.

3 Trends Likely to Impact the Coal Industry

Coal Exports Likely to Rise Amid Higher Steel Production:  Improving coal exports is boosting the prospect of the U.S. coal miners.  The rollout of vaccines and easing out of pandemic-related restrictions have revived industrial and commercial activities across the globe in 2021, spurring electricity demand. EIA expects demand for coal from the U.S. electric power sector to increase by 84 million short tons (MMst) in 2021. Per the World Steel Association, global steel demand will grow by 4.5% in 2021 to 1,855.4 Mt and improve by 2.2% in 2022 to reach 1,896.4 Mt.  Coal plays an important role in steel production. Consequently, metallurgical and thermal coal export volumes are likely to increase in 2021and 2022. Per EIA, coal exports will total 92.6 MMst in 2021, up 34% from 2020, and rise by 2.4% year over year to 92.2 MMst in 2022.

Global Coal Demand and Prices to Move Upward: Coal was continuously losing ground to natural gas and other renewable energy as a fuel source, but a global economic recovery in 2021 resulted in a rebound in coal demand. Per the International Energy Agency (IEA), the future of coal demand will be largely decided by demand arising from the Asian countries. The IEA indicates that nearly 75% of global coal demand is generated from Asian countries. Even though the rising usage of renewable energy will pose a big challenge for coal, the demand and use of the commodity are not going to drop in the Asian economies. This, in turn, would continue to boost the prospects of U.S. coal miners. The prices per ton of coal are increasing in tandem with improving coal demand, boosting the performance of coal miners. Per EIA, thermal coal prices for the power sector will increase by 2.6% year over year in 2021 and further improve by 2% year over year in 2022. Prices of metallurgical coal are also improving globally, driving prospects of coal miners.

New Emission Policy Will Hurt Coal Industry: The improvement in demand for coal is expected to be short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will drop significantly. The new policy will also aim at lowering greenhouse emissions by 50-52% by 2030 from the 2005 levels.  Going forward, coal industry operators are likely to face much difficulty as a number of electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage.

 

Zacks Industry Rank Indicates Solid Prospects

The Zacks Coal industry is a seven-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #3, which places it in the top 1% of more than 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 1% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since December 2020, the industry’s earnings estimate for 2021 has gone up by 1840%.

Before we present a few coal stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

 

Industry Outperforms S&P 500 & Sector

The Zacks Coal industry has outperformed the Zacks S&P 500 composite and the Zacks Oil and Gas sector over the past 12 months.

The stocks in the coal industry have gained 232.4% compared with the Zacks Oil-Energy sector’s growth of 84.4%. The Zacks S&P 500 composite has rallied 41% in the same time frame.

One Year Price Performance

Coal Industry's Current Valuation

Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.

The industry is currently trading at a trailing 12-month EV/EBITDA of 7.51X compared with the Zacks S&P 500 composite’s 16.32X and the sector’s 5.51X.

Over the past five years, the industry has traded as high as 8.18X, as low as 2.71X and at the median of 4.69X.

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector


5 Coal Industry Stocks to Keep a Close Watch On

Peabody Energy: St Louis, MO-based Peabody Energy, engages in the coal mining business and has both thermal and metallurgical operations. Nearly 32% of the company’s revenues in 2020 was derived from five customers with whom it still has 28 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2021 to 2026. This assures a steady flow of revenues.

The Zacks Consensus Estimate for Peabody Energy’s 2021 earnings and revenues suggests a year-over-year rise of 103% and 17.3%, respectively.  Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 go up by 205.5%. The stock has gained 859% over the past 12 months.

Peabody Energy currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BTU

Arch Resources Inc.: St. Louis, MO-based Arch Resources currently sports a Zacks Rank #1. The company produces and sells metallurgical and thermal coal. The company recently commenced longwall production at the Leer South mine, which will add high-quality 3 million tons of metallurgical coal annually to its total production. The ongoing rebound in production in the steel industry will create fresh demand for met coal supplied by the company.

The Zacks Consensus Estimate for its 2021 earnings and revenues points to a year-over-year rise of 158.8% and 28.9%, respectively.  Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 earnings go up by 56.4%. The stock has gained 163.5% over the past 12 months.

Price and Consensus: ARCH

Warrior Met Coal Inc: Brookwood, AL-based Warrior Met, sporting a Zacks Rank of 1, produces and exports non-thermal metallurgical coal for the global steel industry. The company produces coal from two highly productive underground mines in Alabama and has an estimated annual production capacity of over 7 million metric tons of coal.

The Zacks Consensus Estimate for 2021 earnings and revenues suggests year-over-year growth of 213.2% and 31%, respectively.  Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 earnings go up by 870%. The stock has gained 74.4% over the past 12 months.

Price and Consensus: HCC

CONSOL Energy: Canonsburg, PA-based CONSOL Energy having a Zacks Rank of 1, produces and exports bituminous thermal coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal, and controls over 1 billion tons of undeveloped reserves. The company is consistently operating its four longwalls but also utilized the fifth longwall during 2021 to meet increasing demand.

The Zacks Consensus Estimate for 2021 earnings and revenues points to a year-over-year rise of 905.4% and 20.9%, respectively.  Over the past 90 days, this company has seen the Zacks Consensus Estimate for 2021 earnings go up by 70.3%. The stock has gained 577.2% over the past 12 months.

Price and Consensus: CEIX

Ramaco Resources Inc.: Lexington, KY-based Ramaco Resources currently sports a Zacks Rank #1. The company produces and sells metallurgical coal. The company has in excess of 262 million tons of high-quality coal reserves and is well positioned to sell coal to domestic as well as international markets. Its low debt and minimal legacy liabilities provide it with financial flexibility. The company supplies a substantial volume of high-quality met coal to domestic steel companies.

The Zacks Consensus Estimate for its 2021 earnings and revenues points to a year-over-year rise of 1,091.7% and 64.8%, respectively.  Over the past 60 days, this company has seen the Zacks Consensus Estimate for 2021 earnings go up by 35.2%. The stock has gained 370.9% over the past 12 months.

Price and Consensus: METC