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Wall Street appeared to be waiting for solar, wind and other green energy alternatives to finally start usurping their traditional rivals as kings of the American energy patch. Well, believe it or not, the experts that dared write obituaries on coal stocks were proved wrong - the sector has been one of the strongest performers during the recent market rally.
Just look at the Market Vectors Coal ETF (NYSE:KOL). This ETF holds major coal producers like Peabody Energy (NYSE:BTU), Consol Energy (NYSE:CNX) and Massey Energy (NYSE:MEE). That trio has been on fire, which has helped KOL soar nearly 80% year-to-date, far outpacing the S&P 500.
Investing in coal isn't limited to the companies that make black gold. Investors should take a look at the companies that make equipment used by the miners to get the stuff out of the ground. We're going to take a look at the top two makers of coal mining equipment here.
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Bucyrus International (Nasdaq:
BUCY)
-Price/Book Value: 1.9
-Forward P/E: 13.7
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Joy Global (Nasdaq:
JOYG)
-Price/Book Value: 5.2
-Forward P/E: 15.5
Searching for Backlogs With Bucyrus
Just as coal miners are impacted by demand for coal from steel makers and iron ore producers, companies like Bucyrus feel the effects of the demand cycle. That makes order backlogs a key data point for investors to look at when evaluating makers of coal mining equipment. In the case of Bucyrus, the backlog picture isn't great at the moment.
When the company announced strong second-quarter results on July 24, it noted that new orders for equipment like drag lines and electric shovels were down 53% from a year earlier. Bucyrus did mention it saw an uptick in demand for parts and services for surface mining machines during the quarter.
Now don't fret over Bucyrus just yet. Coal is a cyclical sector and there are some signs that demand may be starting to pick up, albeit slowly. On July 29, Massey Energy said it's starting to rehire some furloughed miners due to increased demand for coking coal used to make steel. And that demand is coming from, no surprise here, Asia. (Read Cyclical Versus Non-Cyclical Stocks to learn more about the differences between these two types of stocks.)
It's hard to ignore the fact that Bucyrus appears relatively inexpensive, trading at less than two times book value and just under 14 times forward earnings. Those figures account for a 60% run in Bucyrus shares year-to-date.
Oh, Joy (Global)
Joy Global makes the same stuff as Bucyrus. You know, sexy stuff like continuous haulage systems, drills, electric shovels and related products. As such, Joy Global is a demand story just like Bucyrus and the demand story could weigh on the stock for quite a while. One analyst that recently downgraded Joy Global shares said the company's profits and sales may not reach a bottom until 2011.
While Joy Global is working through a decent backlog of orders, it appears the Street is expecting those orders to slow this year and cancellations are a possibility. Worse yet, U.S. coal producers are likely to cut production by 50 million tons this year due to waning demand. Spot coal prices for Appalachian Coal now labor around $45 to $50 a ton, compared to $175 a year ago.
Joy Global had almost $630 million in debt at the end of last year, but it also had $308 million in free cash flow, making the debt load a little more palatable. Some of that cash has been used to fuel a massive buyback program, which should help the bottom line going forward. Joy Global looks reasonably valued here at 15.5 times forward earnings. The company has forecast profits of $3.80 to $4 a share this year on sales of $3.5 billion to $3.6 billion. Analysts had been expecting sales of $3.48 billion on earnings of $3.55 a share when the forecast was announced in June.
Bottom Line: Follow The Demand Story
The runs in Bucyrus and Joy Global (also up 60% year-to-date) have taken place on weak fundamentals and it's hard to tell if this is a case of a market rally lifting all sales or the market pricing in a rebound in demand for coal. On news of increased demand and rising backlogs, Bucyrus and Joy Global are great ways to get in the coal game. With both stocks still a long a way from their 52-week highs, it could be worth starting a small position in either name right now and scaling in as fundamentals improve.
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