Coal stocks have been overlooked over the past few years, mostly due to the green energy wave. Consequently, these stocks are also considerably undervalued based on forward sales and cash flow estimates. Moreover, the best coal stocks also pay substantial dividends, which is ideal for investors in this volatile market environment.
Geopolitical tensions and unprecedented economic conditions have again pushed the coal sector into the spotlight. The Russian invasion of Ukraine and the subsequent response from the U.S. and its allies have had a crippling impact on energy resources. Therefore, demand has skyrocketed across the globe for pivotal commodities.
The rampant inflation rate that’s resulted has been due, in part, to rising commodity prices across the board. Moreover, the post-pandemic environment has been tricky for virtually every industry to navigate. We went from a period of virtually zero activity to a period where consumer demand shot for the moon. With bottlenecks in production, every aspect of power generation has been struggling, pushing the case for coal stocks. Accordingly, let’s look at three of the top coal stocks to invest in right now.
Alliance Resource Partners (ARLP)
Alliance Resource Partners (NASDAQ:ARLP) is one of the largest and most successful coal miners in the U.S. The global energy crisis has led to record high coal prices and incredible demand, which is reflected in ARLP’s robust operating results of late. Its revenues and EBITDA have been growing by double-digit margins year-over-year and are poised for a similar growth trajectory well into next year.
ARLP’s second quarter results were impeccable, with net income quadrupling to $161.5 million from the prior-year period. Moreover, net sales volumes and average sales prices increased by 14% and 43%, respectively, on a year-over-year basis. Moving forward, coal prices aren’t likely to move down. Accordingly, production bottlenecks out of the way, the company could be set for a spectacular showing in future earnings reports.
Additionally, this company’s management could add a variable dividend early next year to complement the fixed dividend. Thus, with an attractive dividend yield of 5.5%, ARLP stock trades at just one-time forward sales.
Arch Resources (ARCH)
Arch Resources (NYSE:ARCH) is another top coal mining and processing firm that produces thermal and metallurgical coal. It’s witnessing a resurgence of sorts after a deplorable 2020 marred by the Covid 19 disaster. Revenue and earnings growth jumped by healthy margins last year, and its momentum has carried over this year. In the past three quarters, the company’s top line has grown by triple-digit percentags, an impressive feat, to say the least.
Rising coal prices have significantly improved ARCH’s balance sheet. Perhaps one of its major competitive advantages over its peers is that it focuses on producing coal for steelmaking, offering greater consistency in demand than thermal coal. The firm is also rewarding its shareholders, including a $6 per share dividend in September. Moreover, it authorized a massive $500 million buyback. If coal prices stay elevated, ARCH stock is likely to trend upward.
Peabody Energy (BTU)
Peabody Energy (NYSE:BTU) is one of the largest coal suppliers in the U.S., with operations in various countries, including China, India, Taiwan, and Australia, to name a few. The company has earned its reputation as one of the more profitable coal producers, with a 22% average gross margin over the past five years.
Elevated coal prices at this time have helped Peabody lower its debt load and improve its cash position. In its second quarter, the company posted an adjusted EBITDA of $578 million, a record result for the company, driven again by higher coal prices. Moreover, the miner generated $342 million in free cash flows, which exceeded total long-term debt by $74 million.
BTU stock hasn’t been a favorite with investors in the coal mining space as it doesn’t offer any dividends. It’s restricted due to its sizeable debt and its strict covenants. However, in the past few quarters, it has done well to bring down its debt load, and already holds a slight net cash position.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.