One of the best things about the fall of a presidential election year is the televised debates between the incumbent commander-in-chief and his challenger. While this year’s debate season has been filed with quips about Joe Biden’s seemingly endless gaffe reel, an equally as notable – though probably not as hilarious – story has developed on Wall Street. While it’s unlikely that political statements have the sole power to move markets, it’s interesting to look at what’s happened in the coal mining industry.
Since Mitt Romney beat a surprisingly “tired looking” Barack Obama in the duo’s first debate on October 3rd, coal stocks reversed their downward trend they’d been on for much of the year, generating world-beating returns over the past two weeks. Up nearly 20% as a group, the bullish action experienced by this industry has been linked to Romney’s vocal support of coal during the debate, as the Governor stated: “I like coal. I’m going to make sure we can continue to burn clean coal […] people in the coal industry feel like it’s getting crushed by your [Obama’s] policies.”
In Obama vs. Romney part deux last night, the President looks to have come out on top, with a CBS post-debate poll giving him an edge of seven percentage points, 37% to 30%. The remaining 33% decided it was two close to call. A CNN snap-poll gave the President a similar edge, 46% to 39%, though it’s notable that Romney typically scored better on questions concerning the economy and taxes. Even Fox News’ most prominent right wing analysts have called the debate a draw, which can be considered a victory when the rose-tinted glasses are removed.
Either way, there are a few ways to play this debate, but the discussion starts and ends with coal. It’s possible that investors will be a bit more bearish on this segment, which is overdue for at least a slight correction. Here’s a few stocks that have seen huge gains since Romney’s win in the first debate.
Arch Coal has returned 25.5% since October 4th, but is still down over 40% on the year. The stock has been pushed down by disappointing earnings, amid weaker than expected coal demand and bloated operating costs. In the first two quarters of 2012, the company has amassed an earnings per share of -$0.14. Arch Coal earned $1.07 last year after making $1.01 in EPS in 2010. The Street is expecting the company to lose another 15 cents a share in Q3; results are reported at the end of the month. Now, Arch Coal is trading at undervalued price multiples across the board, but political banter can’t save its bottom line.
Similar to Arch Coal, Peabody Energy is up close to 19% since the first debate, and is actually trading above its competitor on a price-to-book (1.2X) and price-to-sales (0.8X) basis. Arch Coal sports P/B and P/S ratios of 0.5X and 0.4X respectively. Unlike Arch, Peabody has actually beat the Street’s EPS estimates in its past two quarters, most recently reporting earnings of 73 cents a share in Q2.
While this was a 34.2% decline from the same time last year, it still beat consensus by a whopping 20 cents. The company’s CEO Gregory Boyce couldn’t have said it better, when he stated during the conference call that “Peabody’s weathering the macroeconomic storms well,” due to record demand in China, where net coal imports were up 74% in the first half of the year. Still, Peabody will face some near-term headwinds as coal-to-gas switching and a mild winter are major worries.
Alpha Natural Resources, Inc. (NYSE:ANR)
Alpha Natural Resources is a coal miner with most of its operations in the Eastern U.S. Since the start of 2012, shares of Alpha are down 58.2%, but have seen an identical bump as the rest of its peers did after Romney’s undying support earlier this month. The company has been quite the beast post-recession, generating an average annual revenue growth of 42.3% between 2009 and 2011.
Driven by the same macroeconomic drivers described above, which are squeezing margins near all-time lows, analysts are expecting Alpha to hit year-end earnings of -$1.49 a share, down significantly from the $1.88 it had averaged over the previous two years. If these estimates hold – and Q1 and Q2 results all but ensure they will come close – it would mark the third straight year of EPS declination for the company.
CONSOL Energy Inc. (NYSE:CNX)
Consol Energy is traditionally one of the most efficient coal producers in the U.S., mostly due to its penchant for longwall mining. The obvious players haven’t tightened Consol’s margins as much as its competitors, and the stock is “only” down 5.2% on the year. Compared to the rest of its industry, that’s quite an achievement. Since Romney’s debate victory on October 3rd, shares of the company have seen gains similar to those of the rest of its peers.
Unlike these battered-down competitors, though, Consol trades at book and sales multiples close to 50% above industry averages, and still expects its top line to shrink by 11.5% by the end of the year. The company reports its Q3 results at the end of the month.
Alliance Resource Partners, L.P. (NASDAQ:ARLP)
Last but certainly not least, Alliance Resource Partners is a coal marketer and producer with operations in the Midwest and Maryland. Since the recession, the company has grown its earnings at an annual rate of 50.4% a year, but analysts expect this growth to slow considerably over the next half-decade, with early estimates forecasting 4-5% growth per year. In 2012 thus far, shares of the company have lost over 15%, though it is up from $58 a share to $63 after Romney and Obama’s first debate.
Analysts expect earnings to shrink by 15.6% by year’s end, though the company did beat the Street’s Q2 estimates by 13 cents with an EPS of $1.83. Current quarter estimates predict an EPS of $1.78, which would be a 38-cent decline year over year. Alliance trades at a similar valuation ratios as Consol, and is more or less in-line with its historical averages.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Related tickers: Walter Energy, Inc. (NYSE:WLT), Natural Resource Partners LP (NYSE:NRP), Cloud Peak Energy Inc. (NYSE:CLD)
