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4 Stocks to Watch Amid Strong Prospects of the Coal Industry

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The Zacks Coal industry stocks have staged a rebound courtesy of global demand after the pandemic-led lockdowns and surging natural gas prices.  Improving coal prices and demand boosted the profit levels of coal operators last quarter. The trend might 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 boost production. The ongoing conflict between Russia and Ukraine is creating fresh demand from coal importing countries and pushing up coal prices.

As global steel production improves, coal stocks like Peabody Energy Corporation (BTU - Free Report) , Alliance Resource Partners L.P. (ARLP - Free Report) , ARCH Resources Inc. (ARCH - Free Report) and CONSOL Energy Inc. (CEIX - Free Report) are expected to gain. 

About the Industry

The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined by either the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity, and manufacture steel and cement. 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 in 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. This would result in additional demand for coal.

3 Trends Likely to Impact the Coal Industry

Coal to Benefit From Higher Steel Production:  Improving coal exports are boosting the prospect of U.S. coal miners.  The rollout of vaccines and easing of pandemic-related restrictions have revived industrial and commercial activities across the globe, spurring electricity demand. EIA expects U.S. coal production volumes to increase 3.9% in 2022 and touch 601 MMst (millions of short tons) but decline by 2.1% in 2023 to hit 588 MMst. Per the World Steel Association, global steel demand will improve 0.4% in 2022 to reach 1,840.2 Mt.  Coal plays an important role in steel production.

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 demand. Per the International Energy Agency (“IEA”), the demand for coal can attain new highs in 2022 due to a rebound in the global economy, aided by demand arising from the Asian countries. Even though the rising usage of renewable energy will pose a big challenge for coal, the demand and use of the commodity will not fall in the Asian economies. This, in turn, would continue to boost the prospects of U.S. coal miners. The ongoing military conflict in Ukraine has hampered the supply of coal volumes from Russia to other countries, creating coal export opportunities for U.S. coal producers. Taking into consideration all factors, IEA expects global coal demand to increase to 8,025 million tons in 2022 and remain strong throughout 2024.

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 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 fall 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 many difficulties as a number of electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage. Per EIA, total coal consumption in the United States will drop 3.3% in 2022 to 528.1 MMst and drop further by 6.3% to 496.9 MMst in 2023.

Zacks Industry Rank Indicates Strong Prospects

The Zacks Coal industry is an eight-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #28, which places it in the top 11% 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 strong performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% 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 August 2021, the industry’s earnings estimates for 2022 have gone up 510.3%.

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 91.4% compared with the Zacks Oil-Energy sector’s growth of 15.1%. The Zacks S&P 500 composite has declined 12.4% 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 4.1X compared with the Zacks S&P 500 composite’s 12.26X and the sector’s 3.66X.

Over the past five years, the industry has traded as high as 7.6X, as low as 3.05X and at the median of 4.81X.

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


 

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



 

4 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. In 2021, nearly 26% of the company’s revenues was derived from five customers with whom it still has 17 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2022 to 2025. This assures a steady flow of revenues.

The Zacks Consensus Estimate for Peabody Energy’s 2022 earnings and revenues suggests a year-over-year rise of 53% and 48.4%, respectively.  Over the past 60 days, this company’s Zacks Consensus Estimate for 2023 has gone up 57.6%. The stock has gained 62.2% over the past six months compared with the industry’s rally of 44.1%.

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

Price and Consensus: BTU

Alliance Resource Partners L.P.: Tulsa, OK- based Alliance Resource Partners produces and sells coal to utilities and industrial users in the United States. The firm produces coal from seven mining complexes operated by its subsidiaries. ARLP earns royalty income from coal produced by its mining complexes and royalty income from mineral interests it owns in different basins. The firm currently has a Zacks Rank #3 (Hold).

The Zacks Consensus Estimate for 2022 earnings per unit and revenues implies a year-over-year rise of 151.5% and 47.2%, respectively.  Over the past 60 days, this firm’s Zacks Consensus Estimate for 2023 earnings has gone up 22.9%. The stock has gained 33% over the past six months.

Price and Consensus: ARLP

Arch Resources Inc.: St. Louis, MO-based Arch Resources currently has a Zacks Rank #2 (Buy). The company produces and sells metallurgical and thermal coal. The company 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 2022 earnings and revenues indicates a year-over-year rise of 205.9% and 67.2%, respectively.  Over the past 60 days, this company’s Zacks Consensus Estimate for 2023 earnings has gone up 40.1%. The stock has gained 42.7% over the past six months.

Price and Consensus: ARCH

CONSOL Energy: Canonsburg, PA-based CONSOL Energy, having a Zacks Rank of 3, produces and exports bituminous thermal coal. The company owns and operates the Pennsylvania Mining Complex and the Baltimore Marine Terminal, and controls more than 1 billion tons of undeveloped reserves. The company is consistently operating its four longwalls and utilized the fifth longwall in 2021 to meet increasing demand.

The Zacks Consensus Estimate for 2022 earnings and revenues suggests a year-over-year rise of 360.2% and 36.9%, respectively. The stock has gained 90.5% over the past six months.

Price and Consensus: CEIX