I remain concerned about the volatility in CNX shares. As a holder, my own long term view on the stock remains bright -- particularly in relation to BTU and ACI, Wall Street's two real darlings in this group. But very recent pricing levels for CNX have appeared to me as "full" by any fundamental metric. Indeed, when deconstructing CNX, isolating the "coal stub" and then projecting year ahead earnings onto it (based upon the company's own forecast of average revenue realizations during the coming year of about $40.50/ton, while holding cost increases to about 5%), coal earnings augmented by CXG ought to be just under $6.00. At a 15X market multiple, there doesn't appear to be much room right now.
Of course, the scrubber story has huge implications for the CNX coal business in the out years. As newer long term steam coal supply contracts replace those about to roll off, average revenue realization will rise. But to reach a $120/share target, it seems to me that revenue must rise to about $44/ton on average. While I believe that is likely, particularly 2-3 years out, I don't think that the market is willing to price it into the stock today -- particularly because the Fed/rate/inflation story dogging the general market carries implications for significant economic slowdown in the near term, which is really the enemy of utility coal consumption.
That leaves us with multiple expansion as the only real basis for substantial share price appreciation (in the near term) from these levels. But multiple expansion is normally associated with declining interest rates, not rising rates. Of course, multiple expansion can also result from a Street reassessment of industry fundamentals. But its hard to imagine that basic energy concerns, which had been trading at single digit multiples, now suddenly merit multiples at double and triple historic norms just because of what might be no more than cyclical increases in demand for energy. Moreover, there is ample evidence that much of the recent increases in energy pricing (at least in our economy) is as much a function of currency readjustments (the decline of dollar value vis the euro and yen) as anything else -- hardly the stuff of multiple expansion.
Bottom line -- in time, CNX should more than grow into its current share price and will likely hit even the most optomistic analyst targets. But I think that the Mo-Mo crowd is going to be disappointed from here on; and so will anyone else taking a cure from those folks.
"the Fed/rate/inflation story dogging the general market carries implications for significant economic slowdown in the near term, which is really the enemy of utility coal consumption."
AM, as usual, your analysis is excellent, but i must take issue with this comment.
the reality is that coal is the ideal long-term play because of the fact that energy consumption will inevitably shift to utility/grid/plug-in service as petroleum prices rise. it's a win-win-win:
dollar devaluation - favors all hard assets isolationist politics/commie-whacko sabre rattling - favors domestic nat resources expensive oil - favors a transition to plug-in vehicle power
the reality is that the dollar will ALWAYS depreciate faster than the economy deccelerates. that's the way it is designed, and the bankers/hedgies who run our world wouldn't have it any other way - that's the mechanism which makes it so easy to scoop off billions of froth off of the top of the royal scam which is the greenback.
all of these factors favor coal. as for the market's infatuation with the powder river basin - what's not to be in love with? better coal, mountains of it easily accessible, no pesky hillbillies to evict in getting to it.