Peabody Energy Corporation (BTU), Arch Coal Inc (ACI): Getting Down and Dirty in Coal

Peabody Energy Corporation (NYSE:BTU) shares look fairly priced based on analyst’s dismal 2013 expectations. Using a cash earnings times a capitalization multiplier valuation, reasonable business value looks around $12 to $13 a share at a slightly higher than average industry multiple range of 8 to 9 based on estimated revenues around $7.7 billion and average cash earnings of $396 million.

Arch Coal Inc (NYSE:ACI) is another large coal producer, selling roughly 14% of the U.S. coal supply. It reported a net loss of $70 million in the first quarter of 2013, versus a net loss of $8 million in 2012. Revenues totaled $826 million, down about $213 million from the prior year on lower sales volumes. EBITDA was $84 million compared to $180 million a year ago.

Arch Coal Inc (NYSE:ACI) shares may look cheap, but they could be a risky proposition. Unlike its peers, the company has not yet shown consistent free operating cash flow and it also has a very large debt burden. Based on revenues of $3.6 billion and possible cash earnings of $133 million, Arch Coal Inc (NYSE:ACI)’s fair business value looks around $5 per share at an average 8x multiple.

Alpha Natural Resources, Inc. (NYSE:ANR) is the third-largest publicly-traded U.S. coal producer, as measured by its 2012 sales of $7.0 billion. The company reported a first quarter 2013 adjusted net loss of $104 million compared with an adjusted net loss of $58 million in 2012. Adjusted EBITDA was $117 million compared to $210 million and sales were $1.3 billion versus $1.9 billion last year. The 31% drop in revenues was primarily due to lower average pricing and lower thermal coal volumes.

Alpha Natural Resources, Inc. (NYSE:ANR)’s valuation might be attractive. Anticipating sales of $5.3 billion and cash earnings of $260 million places the company’s reasonable business value around $9 a share, given the industry’s average multiple of 8.

Conclusion

The coal industry doesn’t have a whole lot going for it. But increased demand from utility customers and reduced coal supplies could set the companies up for some surprisingly decent results. Given the almost universal gloom surrounding the sector, any unexpected good news may benefit shareholders. Although I would not consider them a true investment, coal stocks might offer a reasonable speculative play.

Bob Chandler has a long position in Alpha Natural Resources. The Motley Fool has no position in any of the stocks mentioned. Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Getting Down and Dirty in Coal originally appeared on Fool.com is written by Bob Chandler.

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