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Coal Industry Players Continue to Fight a Losing Battle

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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 and in steel and cement manufacturing.

However, the importance of coal and the coal industry has declined 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 continuously losing ground, as natural gas and renewable energy are being preferred over coal for energy needs. The shift in loyalty is primarily due to concerns about increase in 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 diminish the popularity of 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 589 million short tons (MMst), indicating 14.3% decline from 2018. Coal consumption is estimated to further drop to 575.7 MMst in 2020.
     
  • Amid declining domestic consumption, coal exports have been aiding U.S. miners to gain some lost ground. However, the latest projection from EIA indicates that coal exports from the United States will drop to 100 MMst in 2019 or 13.5% from 115.6 MMst in 2018. U.S. coal exports are expected to drop further to 90.4 MMst in 2020. Higher coal stockpiles in European countries and increasing usage of cheap natural gas supplied from Russia are expected to result in the decline. 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 a decline in coal exports may hurt its prospects.


Zacks Industry Rank Indicates Weak Prospect

The Zacks Coal industry is a 14 stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #228, which places it at the bottom 11% 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 11% 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 nearly 45%.                                

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 & Sector

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

The stocks in the coal industry have collectively declined 44.1% compared with the Zacks Oil-Energy sector’s decrease of 19.9%.  In contrast, the Zacks S&P 500 composite has gained 2%.

One Year Price Performance
 





Coal Industry’s Current Valuation
    
Since coal companies have a lot of debt on their balance sheet, 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 3.96X compared with the Zacks S&P 500 composite’s 11.1X and the sector’s 4.66X.

Over the past five years, the industry has traded as high as 7.28X, as low as 2.88X and at the median of 4.4X.
 
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 over the past few years. At present, higher volumes of coal are produced from mines with minimum human intervention, which also has a negative impact on job growth in the coal industry.

The change in policy by the current U.S. administration is assisting coal-fired plants and creating demand for the commodity but the expected drop in U.S. coal exports is likely to create more challenges for the industry. Amid such difficulties, coal companies are trying to reduce operating costs, idle high cost mines, produce more low cost mines and enter into collaborations to remain competitive.

To offset the negative impact of clean natural gas and renewable sources on coal demand, Peabody Energy Corporation (BTU - Free Report) and Arch Coal Inc. (ARCH - Free Report) have decided to form a joint venture by merging some of their most-productive coal mines in Powder River Basin and Colorado.  The objective is to lower operating costs and operate low cost mines to keep coal competitive as an energy source.

At present, among the coal stocks under our coverage, only Yanzhou Coal Mining Company Limited (YZCAY - Free Report) 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.

Zoucheng, China based Yanzhou Coal Mining Company Limited has returned 34.4% year to date and its current dividend yield is 6.57%. The Zacks Consensus Estimate has remained unchanged over the past month.
 

Price & Consensus: YZCAY
 


 

Brookwood, AL, based Warrior Met Coal, Inc. (HCC - Free Report) has lost 6.6% year to date and its current dividend yield is 0.9%. The Zacks Consensus Estimate has remained unchanged over the past month.

Price & Consensus: HCC
 



Canonsburg, PA based CONSOL Coal Resources LP (CCR - Free Report) has lost 19% year to date and its current dividend yield is 15.25%. The Zacks Consensus Estimate has remained unchanged over the past month.
 

Price & Consensus: CCR
 




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