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Coal Industry Stock Outlook: Gloomy Days Ahead

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The Zacks Coal industry comprises companies that are involved in the discovery and mining of coal. Per the U.S. Energy Information Administration (“EIA”) report, 2019 coal consumption in the United States will fall to 652.3 million short tons (“MMst”), reflecting a 5.6% decline from expected 2018 levels and the lowest level since 1979.

Let’s take a look at the industry’s three major themes:

  • U.S. coal companies are gradually losing ground, as natural gas and renewable energy are being preferred over coal for energy needs. The shift in loyalty is primarily due to increasing concerns about rising emission and the effects of pollution on human growth and development. Availability of cheap shale gas in the United States, technological advancement and incentives on usage of renewable energy continue to push back coal as a source of energy.
  • Despite concerns over air pollution due to usage of coal, its wide availability and low prices compared with other conventional and alternate fuel energy sources makes it a preferred choice of fuel in most developing nations. As a result, the EIA report forecasts 2018 coal exports from the United States to touch 112.7 MMst, up 16.2% from the 2017 level. This is definitely a support for U.S. coal miners as domestic usage of coal is dropping. Per a World Coal Association report, 37% of electricity and 74% of steel worldwide is produced utilizing coal as an energy source.
  • The Trump administration clearly has a pro-coal stance, with the Environmental Protection Agency coming up with an Affordable Clean Energy proposal to replace the stringent Clean Power Plan. The administration forecasts a 4.5% to 5.8% increase in the production of coal for generating electricity by 2025 under its proposal. Trump also decided to exit the Paris Climate Agreement to promote usage of coal and revive the industry.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Coal industry is a 14 stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #177, which places it at the bottom 32% of more than 250 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 outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 39% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2018, the industry’s earnings estimate for the current year has gone down by approximately 10.3%.

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 Lags S&P 500, Beats Sector

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

While the stocks in this industry have collectively declined 11%, the Zacks S&P 500 Composite and Zacks Oil-Energy Sector have lost 5.5% and 12.2%, respectively.

One-Year Price Performance

Coal Industry’s Current Valuation

Since coal companies have a lot of debt on their balance sheets, 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 trailing 12-month EV/EBITDA of 4.25X compared with the Zacks S&P 500 composite’s 10.08X and the sector’s 5.02X.

Over the past five years, the industry has traded as high as 7.59X, as low as 3.24X and at the median of 4.63X.

Enterprise Value/EBITDA  5 Years

To Sum Up

The coal industry has already seen its share of difficulties, with dropping demand, rising competition from other energy sources and increasing emission awareness taking a toll on the industry for past few years. At present, higher volumes of coal is produced from mines with minimum human intervention, which also has a negative impact on job growth from the coal industry.

However, things have started to improve lately. Improvement in thermal coal demand in the global market, better demand for met coal in steel industries and improving met coal prices should favor the space. The change in policy of the new U.S. administration is assisting coal-fired plants and creating demand for the commodity.

The coal reserves across the globe are currently estimated to be 1.1 trillion tons and this fossil fuel can last nearly 150 years at the current rates of production. Since coal reserves will last much more than oil and natural gas reserves, initiatives are being taken across the globe to utilize coal more efficiently, keeping a check on the emission levels.

At present, among the coal stocks under our coverage, SunCoke Energy Inc. (SXC - Free Report)   sports a Zacks Rank #1 (Strong Buy) and Foresight Energy LP (FELP - Free Report) carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus EPS estimate for Lisle, IL based SunCoke Energy has moved 48.3% higher for the current year over the last 60 days. The stock has lost 18.4% over the past month.

Price and Consensus:SXC

The consensus EPS estimate for St Louis, MO based Foresight Energy LP has moved 16.2% higher for the current year over the last 60 days. The stock has lost 12.9% over the past month.

Price and Consensus:FELP

Investors may also hold on to the following stocks carrying a Zacks Rank #3 (Hold)

The consensus EPS estimate for St Louis, MO based  Arch Coal (ARCH - Free Report) has moved 28.5% higher for the current year, over the last 60 days. The Zacks Rank #3 stock has lost 10.4% over the past one month.

Price and Consensus:ARCH

The consensus EPS estimate for Canonsburg, PA based Zacks Rank #3 CONSOL Coal Resources LP (CCR - Free Report) has moved 4.65% higher for the current year over the last 60 days. The stock has lost 11.9% over the past one month.

Price and Consensus:CCR

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