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Coal Industry Stock Outlook: Going to Get Tougher Ahead

Jewel Saha

The Zacks Coal industry comprises companies that are involved in the discovery and mining of coal. Depending on the deposit, coal is mined by either opencast or underground mining. Coal is valued for its energy content and used worldwide to generate electricity.

However, importance of coal and the coal industry has been falling gradually in the United States over the past few years, with natural gas and renewable sources creating more downside pressure.

Let’s take a look at the industry’s three major themes:

  • U.S. Coal companies are gradually losing ground, as natural gas and renewable energy are being preferred over coal for energy needs. The shift in loyalty is primarily due to rising concerns about rising emission and the effects of pollution on human growth and development. Availability of cheap shale gas in the United States, technological advancement and incentives on usage of renewable energy continue to push back coal as a source of energy.  The latest report from U.S. Energy Information Administration (“EIA”) forecasts 2019 coal consumption in the United States to fall to 602.5 million short tons (MMst), reflecting a 12.3% decline from the 2018 levels and coal consumption to further drop to 560.4 MMst in 2020.
     
  • Despite declining domestic consumption of coal, coal exports were aiding the U.S. Coal miners to gain some lost ground. However, the latest projection from EIA indicates that coal exports from the United States will drop to 101.9 MMst in 2019 or 11.8% from 115.6 MMst in 2018. U.S. coal exports are expected to drop further to 94.8 MMst in 2020. The reasons behind the drop would be higher coal stockpiles in European countries and increasing usage of cheap natural gas supplied from Russia. In addition, rising coal exports from Indonesia and Australia and proximity to Southeast Asian countries (high coal demand zone) are hurting U.S. shipments.
     
  • The Trump administration clearly has a pro-coal stance, with the Environmental Protection Agency coming up with an Affordable Clean Energy proposal to replace the stringent Clean Power Plan. Trump also decided to exit the Paris Climate Agreement to promote usage of coal and revive the industry. Employment in the coal industry remained steady in the last two years but the possibility of declining coal exports could hurt its prospects.


Zacks Industry Rank Indicates Weak Prospects

The Zacks Coal industry is a 15 stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #180, which places it at the bottom 30% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 30% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since December 2018, the industry’s earnings estimate for the current year has gone down by approximately 4.3%.

Before we present a few coal stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
 
Industry Lags S&P 500, Beats Sector

The Zacks Coal industry has underperformed the Zacks S&P 500 composite but outperformed the Zacks Oil and Gas sector over the last 12 months.

The stocks in this coal industry have collectively declined 11.3%, while the Zacks S&P 500 Composite has gained 10.6% and the Zacks Oil-Energy Sector has lost 12.9%, respectively.
 

One Year Price Performance



Coal Industry’s Current Valuation
    
Since coal companies have a lot of debt on their balance sheets, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
 
The industry is currently trading at trailing 12-month EV/EBITDA of 4.6X compared with the Zacks S&P 500 composite’s 11.29X and the sector’s 4.9X.

Over the past five years, the industry has traded as high as 7.79X, as low as 3.06X and at the median of 4.6X.
 

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500
 


Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector
 



To Sum Up

The coal industry has already seen its share of difficulties, with dropping demand, rising competition from other energy sources and increasing emission awareness taking a toll on the industry for past few years. At present, higher volumes of coal is produced from mines with minimum human intervention, which also has a negative impact on job growth from the coal industry.

The change in policy of the new U.S. administration is assisting coal-fired plants and creating demand for the commodity but the expected drop in U.S. coal exports is going to create more challenges for the industry. However, per a World Coal Association report, 71% of steel worldwide is produced utilizing coal as an energy source. This should provide some resistance to the declining usage trend.

The coal reserves across the globe are currently estimated to be 1.1 trillion tons and this fossil fuel can last nearly 150 years at the current rates of production. Since coal reserves will last much more than oil and natural gas reserves, initiatives are being taken across the globe to utilize coal more efficiently, keeping a check on the emission levels.

At present, among the coal stocks under our coverage, only China Coal Energy Co. (CCOZY)  sports a Zacks Rank #1 (Strong Buy) and the majority of coal stocks carry a Zacks Rank#3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beijing, China based China Coal Energy Company Limited has returned 8.69% year to date and its current dividend yield is 1.34%. The Zacks Consensus Estimate remained unchanged over the past month.




Price and Consensus:CCOZY



Houston, TX based Natural Resource Partners L.P. has returned 8.92% year to date and its current dividend yield is 4.32%. The Zacks Consensus Estimate remained unchanged over the past month.

Price and Consensus:NRP



Canonsburg, PA based CONSOL Coal Resources LP has returned 7.98% year to date and its current dividend yield is 11.57%. The Zacks Consensus Estimate remained unchanged over the past month.

Price and Consensus:CCR



Tulsa, Oklahoma based Alliance Resource Partners, L.P. has returned 10.15% year to date and its current dividend yield is 11.1% better than S&P 500 yield of 1.88%.

Price and Consensus: ARLP



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Natural Resource Partners LP (NRP) : Free Stock Analysis Report
 
CONSOL Coal Resources LP (CCR) : Free Stock Analysis Report
 
China Coal Energy Co. (CCOZY) : Free Stock Analysis Report
 
Alliance Resource Partners, L.P. (ARLP) : Free Stock Analysis Report
 
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