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Coal Stocks Take Their Lumps

Posted: Mar 20, 2009 15:35 PM by Greg Sushinsky

Tickers in this Article: NRP, CNX, MEE, ACI, BTU

Major coal producer Peabody Energy (NYSE:BTU) has seen its stock take a huge hit in the last year, losing 70% of its value from its high of $88 a share down to its current $26. The other coal producers have slumped along with it as a confluence of factors has driven the stocks down. The deep recession, the commodity bubble bursting and the cyclical fall-off in energy prices - all related and overlapping factors - have played into this. Add the uncertainty of how government energy policy will affect the coal industry and a fear of a dark future that has permeated the investment markets, and you can see why Peabody, flying high in 2008, crashed into the pits. Can it climb out?

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Peabody's Business
Peabody does over $4 billion in annual revenue, and although its earnings per share have bounced around in the last five years, its revenues have gradually, steadily increased. With the cyclical nature of commodity and energy pricing, its income has ranged from as low as 69 cents a share back in 2007 to the $3 range, with estimates for this year still pegged in the $3 area.

Simply put, with the wild gyrations of the markets and the multiple influences of commodity trends, economic cycles and even political jaw-boning, long-term investors need to zero in on the underlying business prospects. Peabody, for all the doom and gloom about coal, energy, commodities and the markets, is actually still doing good business. It is also continuing on plan with long-term capital expenditures, regardless of the worrisome news climate. (Find out how specialized ETFs can give your portfolio the punch it needs; check out Singling Out Sector ETFs.)

Coalfield Blues
Misery has company, especially in the stock market. Arch Coal (NYSE:ACI) has had its stock chewed to bits, down 84% from $77 to as low as $10, and now trades at $13. Yet if you examine its business prospects and what it is actually earning, like Peabody, this destruction of its stock price seems unwarranted. While Peabody delivers about 10% of the energy for electricity in the U.S., Arch delivers nearly 6%. It's also still paying its full dividend, unlike a lot of the more glamorous blue chips. The stock may not be going anywhere, but this company, like Peabody, won't be going away anytime soon.

Massey, Consol Energy and Natural Resource Partners
You will find similar stock-smashing for other large coal producers, such as Massey Energy (NYSE:MEE), down from $95 and now selling at just over $10. Fundamentals? Investors didn't seem to care when they sold it off, as earnings and estimates seem to be holding up. There is news and legitimate environmental concern over all the major coal companies, as a note on Massey's emissions regarding the climate shows. Not to gloss this over, but more about that later.

Consol Energy (NYSE:CNX), another major coal producer that spun off its natural gas business yet still is a large stakeholder, was cited by Barron's as an attractive undervalued stock. The counterbalance to all the negative forces that weighed down coal stocks is, quite simply, that pending economic recovery will benefit Consol and the others. On the other hand Natural Resource Partners (NYSE:NRP), one of the other big coal companies, looks like a star stock performer since its price has only been cut in half. Its earnings, while unspectacular, have held even.

It's Not Easy Being Green
The largest overhanging concern on the coal stocks, indeed on all the energy stocks, is of course the environment. While most of us as investors and inhabitants of the planet are concerned about the long-term health of earth and our favorite species (humans), it's also clear that despite our desires to stop relying on fossil fuels, coal and oil, it's not going to be a simple, overnight change. Solar, wind, thermal, hydrogen or even other organic fuels are not seen as replacing coal and oil for decades. Even while the Obama administration would like to point the U.S. in this direction, it will be a massive, long-term change that requires decades, not years. That's barring some phenomenal breakthrough such as the wide-scale use of net zero-energy, or something so exotic and far out that only the genius Nikola Tesla would understand it or be able to bring it about, were he still alive.

So for now, even if we transition strongly to greener ways, coal and oil have their realistic place. Some socially conscious investors consider the energy stocks evil and to be avoided, while others of us admit to the reality that we all participate in their necessary use, even if we hope society is on its way to one day being green. (Innovations in energy and consumption grow as companies adopt them to reduce costs; read more in Clean Or Green Technology Investing.)

Coal Stocks' Future Is Bright, Not Dark
In the backward Bizarro World of Superman Comics, lumps of coal function as currency. In the investment world, coal stocks were slammed down to the point of ridiculousness with a gross overreaction and sell-off. So while other industries may be as murky as the markets, even if coal commodity prices modestly rebound, Peabody Energy, Arch Coal and the others look like excellent long-term buys. While they may slog through the markets this year, when their cyclical turn comes and investors start to realize the value and potential of these stocks for the next two to five years (watch when the institutions start to pick up these bargains), Peabody will deliver - not a lump of coal in your investment stocking, but real investment profits.

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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