Coal remains an unpopular yet essential fuel for global energy needs. Coal stocks have reflected this in their lowered share prices, yet the prospects for the coal business on the horizon may turn this around.
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Dark Days For Coal?
Coal has been cited as a villain in carbon emissions, implicated in climate change and energy sustainability issues.Yet the alternative energy fuels such as solar and wind are not a major part of the usage landscape. There are issues with nuclear power, while natural gas, though abundant, has thus far been underused. Cap-and-trade regulation as well as potential new EPA emissions regulations loom for carbon fuels. Thermal coal prices and demand have suffered due to these pressures as well as the crush of the global economic slowdown during the recession. Safety issues also remain. Mining deaths such as the ones in the tragic explosion in a Massey Energy (NYSE:MEE) mine as well as the recent death of a miner at a Peabody Energy (NYSE:BTU) operation remind us that coal mining is still a dangerous task.
Coal Stocks Blackened
Earnings for coal producers have been hammered. Peabody Energy saw its earnings per share dip from $3.52 in fiscal 2008 to $1.67 in fiscal 2009. The stock price was mashed along with this, down to a 52-week low of $28.09. Peabody stock had been as high as $52.14 in the last 52 weeks, and trades currently at $43.29. Things were even worse for Arch Coal (NYSE:ACI), which saw profits flattened from $2.47 per share in fiscal 2008 to a meager 27 cents in fiscal 2009. Its stock price deeply retreated as well.
Is There Any Good News?
Global demand for coal is improving. Metallurgical or coking coal, used in steel making, shows increased demand, as does thermal coal. Steel plant utilization is on the rise, while coal still generates roughly half the electric power in the U.S. The beating down of the coal stocks and the trashing of their prospects has been overdone. Peabody, Arch and other coal stocks such as Consol Energy (NYSE:CNX) and Patriot Coal (NYSE:PCX) represent potential value in light of this.
The Long Haul
The profound change in the long-term global demand picture for coal, where the opportunities will be in Asia in the decades ahead, is significant for investors. For those who have even a reasonable time frame, such as six to 18 months, the improving coal demand should brighten the investment picture. For investors willing to look further out, the fundamental demand picture in Asia is considerably more. Peabody Energy is powerfully positioned with its Australia operations to take advantage of the unfolding global opportunities. Its close operations can deliver seaborne coal swiftly into the Chinese and Indian markets. Peabody, though strong in the U.S., believes nearly 90% of future coal demand will be from Asia.
Dark Days Over?
The coal industry will continue to face unpopularity, even as it's needed to meet the growing demands of our energy-hungry world. So coal stocks will likely continue to reflect investors' ambivalence, too. Watch for price dips, particularly in contrast to growing earnings. While these coal stocks represent potential value and growth plays, Peabody looks to be the strongest of the group. It can be a big winner. (Read Forget Green Stocks, "Green" Will Do to learn about the advantages of clean coal.)
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