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Stocks of coal producers, like many of their resources-based brethren, enjoyed soaring share prices during the commodities bull market of 2007 and the first half of 2008. And just as the bears seized the day in commodity prices, they also grabbed a hold on shares of coal producers, sending the stocks of some of the largest coal makers down more than 50% over the past year.

These stocks became favorite short targets for hedge funds desperate to generate trading profits in the face of redemptions and forced margin calls. Add in slackened demand from emerging markets and critical customers such as the auto, construction and steel industries, and coal stocks have been seriously imperiled by the downturn in the global economy. (For more, check out How To Invest In Commodities.)

Unfortunately, the outlook is as dark as a coal miner's uniform after a day of work. Several major coal producers are scaling back their 2009 production in an effort to cope with waning demand and profits.

Let's take a look at four major U.S. coal producers to see if there's any value in the group:

Company 52 Week Change Forward P/E
Arch Coal
-70% 3.8
Consol Energy
-64% 5.6
Massey Energy
-62% 3.4
Peabody Energy
-54% 6.7
Source: Thomson Financial Networks. As of mid-day February 2, 2009

What Does 2009 Have in Store?
Arch Coal delivered disappointing fourth quarter results last Friday, sending its shares down 9% on the day. The company raised somewhat of a red flag when it said it would offer 2009 guidance later in the year. According to its Chairman and CEO Steven Leer, Arch would also be scaling back production by as much as 10 million tons this year and spend more than 50% less on maintenance capital in 2009 than it did last year.

Value in Arch shares likely comes in the form of a sturdy balance sheet that shows short-term receivables outpacing short-term debt by a healthy margin, and operating cash flow of almost $575 million makes Arch a possible buyer of smaller rivals.

Rival Consol Energy on the other hand reported stellar fourth quarter earnings per share of $0.97 compared with $0.04 per share a year earlier, perhaps adding confusion for the industry outlook when compared with Arch's numbers. Consol might be the better play here, even with a higher forward P/E, that ratio is still in the single digits. In addition, Consol is in the midst of a large share repurchase program, of which there is about $400 million left. (Find out what these company programs achieve and what it means for stockholders in A Breakdown Of Stock Buybacks and How Buybacks Warp The Price-To-Book Ratio.)

In addition, the company announced it would keep 2009 production around 2008's level of 65 million tons and that it is idling one mine and reducing production at another.

A Pattern Emerges
Peabody Energy, the largest of the companies mentioned here by market capitalization, issued fourth quarter results and sentiments for 2009 that closely mirrored those of Consol. The company said it earned $1.10 a share in the fourth quarter compared with $0.13 a share a year earlier, though the strong performance didn't keep Peabody from saying global demand for coal would fall by 70 million tons this year.

Like its rivals, Peabody has yet to issue guidance for 2009, though it is likely when forecasts do emerge from these firms, the prognosis will be sobering. What is encouraging about Peabody shares is that they only trade at 2.4-times book value and that the company recently set a $0.24 annual dividend. There is also nearly $450 million in cash on the company's balance sheet and it is expanding into new markets such as Mongolia.

Massey Energy reports its fourth quarter results on Wednesday and it is likely their view for 2009 will mirror that of their competitors. Investors should wait for the numbers before jumping in, but there are several indications that Massey is a value play here. Down 61% in the past year, Massey now trades at a scant 1.2-times book value and its enterprise value of $1.88 billion far outpaces its market cap of about of $1.25 billion.

Wait For 2009 Guidance

Investing in coal stocks right now is going to take some prudence in order to realize profits and it is probably best to wait for the firms to enlighten investors as to what 2009 has in store. There are some moving parts that investors need to be aware such as demand from emerging markets and steel companies, so investors will need to do their homework. If one feels the need to be involved with coal stocks right now, err on the side of caution and go with Consol or Peabody.

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