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Coal Stocks Post Mixed-Bag Q2, KOL ETF in Focus

Zacks Equity Research

The second quarter has been a mixed bag for the coal companies. Three coal producers, Arch Coal (ACI), Consol Energy’s (CNX) and Peabody (BTU), came up with mixed results in the past one week. Arch Coal and Consol reported on July 29 before the market opened while Peabody reported on July 22. Let’s dig a little deeper and find how the coal industry and the related ETF are shaping up:

Consol's Q2 Earnings in Focus

Diversified fuel producer Consol Energy's adjusted earnings of $0.07 per share for the second quarter missed the Zacks Consensus Estimate of $0.25 but was better than last year’s loss of $0.03 a share. Its revenues grew 13.2% to $937.4 million and beat the Zacks Consensus Estimate of $922 million buoyed mainly by the natural gas segment.

The company produced 8.3 million tons of coal, of which 1.0 million tons were low volatile, 0.3 million tons were high volatile and 7.0 million tons were thermal coal. The production was within the guided range of 8.1–8.5 million tons. Average sales price for all types of coal were substantially down in the quarter. Consol has added about 1% since the results.

Arch Coal Q2 Earnings in Focus

Arch Coal’s second-quarter 2014 adjusted loss of $0.46 per share was narrower than the Zacks Consensus Estimate of a loss of $0.48 but wider than the year-ago loss of $0.29. Arch Coal’s total revenues of $714 million missed the Zacks Consensus Estimate of $718 million and declined 6.9% year over year.

The company continued to lower its metallurgical coal sales volume guidance as it did last season. Management now expects to ship 6.3 million to 6.9 million tons for 2014 (down from 6.3 to 7.3 million tons). Prior to this, Arch Coal reduced its expectation to the range of 6.3 million to 7.3 million tons from the previously guided range of 7.5 million to 8.5 million tons (read: Coal ETF in Focus on Sluggish Earnings).

Despite the lower shipment forecast, the market responded positively to Arch Coal and the stock climbed 6.64% following earnings.

Peabody Q2 Earnings in Focus

Peabody Energy reported a loss of $0.28 per share in the second quarter against the Zacks Consensus Estimate of a loss of $0.27 and the year-ago earnings of $0.33 per share. Total revenue of $1.76 billion improved 1.9% year over year and outdid the Zacks Consensus Estimate of $1.65 billion helped by higher realized prices.

However, the company lowered its 2014 total sales target to 245–260 million tons from 245–265 million tons. The U.S. sales target was cut to 185–190 million tons from 185–195 million tons while the same for Australia was reiterated at 35–37 million tons. Though shares fell more than 1% in the day after the company reported earnings, it added about 2.7% on July 29 – the day its peers turned up with decent earnings (read: Is This the Year for the Coal ETF?).

ETF Impact

Both Consol and Peabody have decent exposures in the coal ETF – Market Vectors Coal ETF (KOL) – while Arch Coal has a minimal focus (1.06%) in the fund. Investors should note that the fund has been gaining steadily since Peabody reported its earnings.  KOL was up 3.82% in the last five days (as of July 29, 2014).

KOL in Focus

KOL looks to track the Market Vectors global coal index, providing exposure to the companies related to the coal industry. Even though this index has a global focus, nearly 40% of its investments are directed toward U.S. companies, followed by China with a 21.3% share.

KOL has amassed an asset base of $167.9 million and charges 59 basis points in fees annually. This fund holds 36 stocks and the top 10 companies hold about three-fifth share of total net assets. The in-focus Consol Energy and Peabody take up the fourth and seventh positions in the portfolio with about 5.86% and 5.49% of total assets (see more in the Zacks ETF Center).

We believe that as the recent jump in ACI shares may not continue especially after mixed-bag sector results, the basket approach could still be a safe option for investors looking to stay exposed to this beaten-down sector.

However, for that also, investors need to be hawk-eyed as the fund holds a Zacks ETF Rank of #4 (Sell) with a ‘High’ risk outlook indicating that the current rally may be short-lived and the longer term path is still bearish (read: Is This One Energy ETF You Need to Sell?). 

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