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Coal: The new black gold
Forget about oil. Coal stocks are the market's latest darlings. So should you mine for more gains?
March 2, 2005: 3:57 PM EST
By Paul R. La Monica, CNN/Money senior writer
Diamonds in the rough?
Coal stocks have soared due to healthy earnings prospects.
CompanyPrice change*2005 P/E2005 Est. EPS Gr.
Peabody Energy105.1%16.6110%
Massey Energy87.3%25.3564%
Consol Energy66.3%15.2119%
Arch Coal42.3%23.0117%
* for past 12 months through 3/1/05
Source:Thomson/Baseline
More about energy stocks
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Oil's still well
Clean coal: a good investment?

NEW YORK (CNN/Money) - It used to be that being threatened with a lump of coal for a present was a bad thing. These days though, many investors wouldn't mind getting lumps of coal...coal stocks, that is.

Rising prices for oil and natural gas has fueled (pardon the pun) a similar spike in the price of coal and earnings for coal processors.

As such, shares of the four major U.S.-based coal companies Arch Coal, Consol Energy, Massey Energy and Peabody Energy are up an average of 75 percent during the past 12 months.

Recently there's even been a superstar coal IPO, of all things. Alpha Natural Resources (Research) went public last month and has surged 32 percent since its debut. If the sector was this hot in the 1940's, Loretta Lynn might have lived a pampered life of luxury as a coal miner's daughter.

But some analysts fear that all energy-related stocks could be in for a rougher second half of the year due to tough earnings comparisons to the end of 2004. So will investors looking to just get in the group now wind up like the proverbial canary in the coal mine?

Stoking more gains for coal stocks?

Bill Burns, an analyst with Johnson Rice, thinks that there will be more volatility for the stocks ahead but that for the long haul, coal companies are in a good position since a large portion of the nation's electricity is still generated from burning coal.

"Demand for coal is still exceeding the supply," Burns said. "It's cheap and very reliable."

There's also the fact that it's not easy to ramp up production and transport coal. For this reason, Richard Price, an analyst with Westminster Securities, said there's a greater likelihood of coal prices increasing this year and next and perhaps even beyond that.

"Coal prices will hold for 2006 and perhaps into 2007 due to the shortfall of supply. It takes a while to ramp up capacity of coal and there are only so many ships to ship it in and rail cars to move it in," Price said.

In addition, Burns thinks that as long as the economy remains healthy, prices should hold up just fine. "A strong U.S. economy has led to big industrial demand for coal and high grade coal is where coal prices have really increased," Burns said.

So earnings growth for the four major coal producers is expected to be extremely robust this year, with analysts predicting profits to more than double for Arch Coal (Research), Peabody and Consol and to surge more than 550 percent for Massey.

Price said he's optimistic that shares of the major U.S. coal firms have more upside but that investors should be cautious since the group has had such a stellar run.

Valuations vary for the group as well. Consol (Research) and Peabody trade at P/Es in the mid-teens, which seems like a reasonable multiple for a commodity stock. But Arch and Massey (Research) are far more expensive, trading at 23 and 25 times 2005 earnings estimates respectively.

Price thinks that Peabody (Research) is probably the best positioned for further gains. Not only is it trading at a bit of a discount to some of its peers, it also has a plant in Australia that supplies metallurgical coal, which is used by steel producers, to China and other nations in Asia, the world's hottest market for coal.

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With this in mind, Price thinks investors would be wise to also look at companies outside of the U.S. that can benefit from the growth in China. He mentioned larger diversified mining companies such as Australia's BHP (Research) , Brazil's Companhia Vale do Rio Doce (Research) (CVRD) and England's Rio Tinto (Research) as top picks.

And one institutional investor who likes the sector says investors shouldn't get scared off by any wild gyrations that the stocks may take as a result of oil price moves. Focusing on the longer-term picture is more important.

"Coal companies will always hit some short-term bumps given the nature of the business, but coal's appeal as an affordable energy source for electricity generation and basic material production seems likely to grow for the foreseeable future," said Bill D'Alonzo, chief executive officer of Friess Associates, in an e-mail. Friess runs the Brandywine family of funds, which owns shares of Arch, Alpha Natural Resources and CVRD.

Analysts quoted in this story do not personally own shares of the companies mentioned and their firms have no investment banking ties to the companies.  Top of page

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