Time To Buy Coal Stocks?

By Greg Sushinsky | June 27, 2009 AAA

With the big coal producers, such as Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU), finding their stock prices near their 52-week lows, it might make investors wonder whether there's something wrong with these companies, the industry, or if it's a buying opportunity. Let's take a look.

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Stock Prices Underground
Arch Coal stock was trading at $15.35 a share recently, well off its $76.00 52-week high, while Peabody Energy stock was at $30.00, down from its high of $88.69. Both companies' stocks suffered from the drop in coal commodity prices as well as the weakening global demand for coal. Also factored in is the expected toughening of environmental regulations on coal producers and the government policy that is encouraging "green" energy. Still, even through this year of recession, both Arch and Peabody have posted healthy profits while their stocks are selling at roughly seven to eight times earnings.

Cleaning Up Carbon?
The House passed the greenhouse gas bill recently, so the push for cleaner burning fuels, including a "cleaner" coal or switching from coal, is entering a new, more tangible phase. Still, the changes will not be overnight and neither coal as an energy source nor as an industry is about to disappear anytime soon. While some producers such as Massey Energy (NYSE: MEE) are currently feeling the brunt of protests due to its mountaintop mining operations, others such as James River Coal (: JRCC), a smaller company selling at an attractive multiple, continue to flourish. Although Massey faces difficulties, it is still profitable, while James River is regarded by some as an attractive buyout candidate. (For more, see What Does It Mean To Be Green?)

Carbon Transition Long-Term
The potential transition away from coal-based electric power generation will be a matter of years if not decades. The difficulties of "cleaning" coal are such that it will not be an overnight process either. Energy (NYSE: CNX), another thriving coal producer, is one of many major producers involved in the experimental coal plant, which is a Department of Energy project, and shows the coal producers are trying, or have been forced, to climb aboard the cleaner-carbon train. Cleaner energy is not some fad, and energy producers of all kinds, including coal, will have to become more involved as this movement gathers momentum.

What About Coal Stocks?
Even with the environmental changes in line, coal producers have a future. While it might be prudent to scale back the earnings estimates of these companies, going-forward demand for coal should still rebound later in 2009 and 2010. Arch Coal stock, for example, had a five-year run-up to June, 2008, of 560%, and still has great business fundamentals, as does Peabody Energy. Both have tremendous coal reserves and concentrate on underground rather than mountaintop mining, and both have the financial resilience to weather many of the regulatory changes and environmental transitions in the next several years. With coal stocks beaten so far down and selling so cheaply, while the gains may not be on the order of the fabulous five-year run-up for Arch, coal stocks still have life as a long-term investment. (To learn more, read Forget Green Stocks, "Green" Will Do.)

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