The U.S coal industry has been going through difficult times in the recent past. Lower natural-gas prices, rising environmental regulations and excessive coal supplies have shaped extraordinary pressure for the coal industry. In the last two years, Market Vectors Coal, an ETF, has dropped 61% in price.
However, I believe the coal industry will improve in the future as lately natural-gas prices have been trending upward, coal supply management is improving and demand for met coal will increase by China and India. Therefore, I believe the three coal stocks best positioned in the industry to buy in anticipation of coal market recovery are Peabody Energy Corporation (NYSE:BTU), Arch Coal Inc (NYSE:ACI) and Cliffs Natural Resources Inc (NYSE:CLF).
The leader
Peabody Energy Corporation (NYSE:BTU) is the largest private-sector coal company of the world. The company is the leading low-cost coal producer in the U.S. region, and also has been increasing its operations in Australia. Peabody Energy Corporation (NYSE:BTU)’s recent efforts to expand its operations in Australia will bode well for the company as the region is among the leading coal exporters of the world. In 2011, Australia was the world’s second-largest coal exporter. Currently, more than 40% of the total revenue of the company are earned from Australian operations.
Another promising sign for Peabody Energy Corporation (NYSE:BTU) is that in comparison to its peers, it has a higher gross margin of 24%. The following table shows the gross margin of Peabody Energy Corporation (NYSE:BTU) compared to its peers in the industry.
| Peabody Energy | Walter Energy | Alpha Natural Resources | Arch Coal | |
|---|---|---|---|---|
| Gross Margin | 24% | 20% | 17% | 17% |
Source: Yahoo! finance
For the 1Q 2013, Peabody Energy Corporation (NYSE:BTU) posted better-than-expected financial results. The company was successful in registering an earnings surprise of 64% in the last quarter. Bottom-line performance for Peabody is likely to benefit from its ongoing cost-reduction efforts. For the year 2013, U.S. mining expenses are expected to be reduced by 2% to 3% as compared to last year.
I am also bullish on these two coal stocks, are you?
Arch Coal Inc (NYSE:ACI) is among the coal stocks which I believe offers investors an attractive investment opportunity. With coal reserves of more than 5.5 billion tons, Arch Coal Inc (NYSE:ACI) is the world’s third-largest private-sector coal producer. The company has been taking steps to increase its operations in China so that it can effectively tap the market opportunities available in China and neighboring markets. Recently, Zhang Shijie has been hired by Arch Coal Inc (NYSE:ACI) to lead the Chinese operations. China offers a huge market potential for Arch Coal Inc (NYSE:ACI), as China is the leading steel producer and met coal consumer of the world.
Despite the ongoing slow coal market environment, Arch does not seem to encounter cash flow problem in the near future, as there is no significant debt repayment until 2016. In 2016, the company is expected to repay $600 million of debt followed by $1,638 million in 2018. Analysts are also bullish on Arch Coal Inc (NYSE:ACI) and have forecast earnings growth rate of 5% per annum for the next five years.
