Amid escalating environmental concerns, the coal sector is set for robust growth, propelled by an amplifying coal demand.
In this piece, we evaluate three coal stocks to shed light on how they can help investors capitalize on the prevailing industry tailwinds.
Stocks Hallador Energy Company (HNRG) and China Shenhua Energy Company Limited (CSUAY) appear to be solid buy candidates for 2024, given their robust fundamentals. Conversely, I think Peabody Energy Corporation (BTU) should be kept on one's watchlist for better entry opportunities.
Let’s first look at what’s shaping the coal industry before delving deeper into the fundamentals of the three stocks.
Many nations have instigated broad climate action plans for coal eradication in the coming years. However, ongoing gas shortages and sluggish renewables growth reinforce that coal continues its role as an essential power generation resource and industrial use across various regions.
Despite coal’s unwavering position as a reliable energy source, it remains the leading contributor to carbon dioxide emissions. Consequently, worldwide efforts to replace coal with renewable energy may trigger a gradual decrease in coal consumption over time. Yet this transition remains slow-paced.
Asia experienced a record surge in seaborne thermal coal imports in December. Driven by peak winter demand, China, the top importer, led the increase, with imports reaching 83.69 million metric tons. This figure marked a significant increase from November's 78.87 million, representing the highest since records began in January 2017.
Chinese and Indian population sizes, the largest globally, suggest an imminent need to fulfill rapidly increasing energy demands, likely to stimulate industry growth in the future.
Furthermore, the U.S. Energy Information Administration predicts total coal consumption to be 391.3 million st in 2024, marking a 1.6% increase from December's forecast. Consequently, the global coal market is expected to grow to $2.1 trillion in 2031 at a CAGR of 4.4%.
In light of these encouraging trends, let's look at the fundamentals of the three Coal stocks, beginning with number 3.
Stock #3: Peabody Energy Corporation (BTU)
BTU is a producer of metallurgical and thermal coal. It markets and brokers coal from other coal producers trades coal and freight-related contracts, and partners in a joint venture to develop various sites. The company operates through Seaborne Thermal Mining; Seaborne Metallurgical Mining; Powder River Basin Mining; and Other U.S. Thermal Mining segments.
The company repurchased approximately 12.6 million shares of its common stock for $266.6 million and paid dividends of $20.7 million during the nine months ended September 30, 2023. From October 1, 2023, through October 27, 2023, the company repurchased an additional 1.1 million shares for $27.3 million. Moreover, the Board approved a new share repurchase program authorizing repurchases of up to $1 billion of the company’s common stock.
On November 9, the company paid a quarterly dividend on its common stock of $0.075 per share. BTU’s annual dividend of $0.30 per share translates to a 1.19% yield on current prices. Its four-year average yield is 3.19%.
Over the past three years, BTU’s revenue and EBITDA grew at CAGRs of 17.9% and 69.6%, respectively. Its levered free cash flow grew at 15.1% and 3.7% CAGRs over the past three and five years, respectively.
In terms of forward non-GAAP P/E, BTU is trading at 4.89x, 51.2% lower than the industry average of 10.01x. Its forward EV/Sales multiple of 0.57x is 71.7% lower than the industry average of 2x.
BTU’s revenue for the fiscal third quarter ended September 30, 2023, stood at $1.08 billion. The company’s operating profit and attributable net income amounted to $158.80 million and $119.90 million, respectively. Also, its income per share came in at $0.82.
BTU’s adjusted EBITDA came at $270 million. As of September 30, 2023, its total current liabilities came at $839.50 million, compared to $918.70 million as of December 31, 2022.
Street expects BTU’s revenue and EPS for the fiscal fourth quarter (ended December 2023) to be $1.19 billion and $1.44, respectively. The company surpassed the revenue estimates in three of the trailing four quarters, which is impressive.
Over the past six months, the stock has gained 14.4% to close the last trading session at $24.98. But it has declined 1.1% over the past nine months.
BTU’s POWR Ratings reflect its prospect. It has an overall rating of C, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an A grade for Value and a B for Momentum and Quality. Within the A-rated Coal industry, it is ranked #8 within 11 stocks.
Click here to see the other ratings of BTU for Growth, Stability, and Sentiment.
Stock #2: Hallador Energy Company (HNRG)
HNRG engages in the production of steam coal for the electric power generation industry. The company owns the Oaktown Mine 1 and Oaktown Mine 2 underground mines in Oaktown; Freelandville Center Pit surface mine in Freelandville; and Prosperity Surface mine in Petersburg, Indiana.
On August 2, 2023, HNRG secured a new $140 million credit agreement with PNC Bank as the administrative agent. This agreement extends through 2026 and involves converting $65 million of existing debt into a new term loan with a maturity date of March 31, 2026, along with a $75 million revolver with a maturity of July 31, 2026.
The amendment also raises the maximum annual capital expenditure limit to $100 million. HNRG’s CEO, Brent Bilsland, appreciated the increased liquidity and flexibility the amendment provides, particularly following the Merom Power Plant acquisition in October 2022.
Over the past three years, HNRG’s revenue and EBITDA grew at CAGRs of 37.5% and 49.8%. Its levered free cash flow grew at 87.4% and 53.6% CAGRs over the past three and five years, respectively.
In terms of forward non-GAAP P/E, HNRG is trading at 4.94x, 50.6% lower than the industry average of 10.01x. Its forward EV/Sales multiple of 0.49x is 75.5% lower than the industry average of 2x.
HNRG’s total revenue for the fiscal third quarter that ended September 30, 2023, increased 94.8% year-over-year to $165.77 million. Its income from operations came in at $23.80 million, up 341.2% from the year-ago quarter. Its adjusted EBITDA increased 95.5% year-over-year to $35.92 million.
The company’s net income and net income per share increased 897.2% and 780% year-over-year to $16.08 million and $0.44, respectively. The company’s bank debt declined 45.7% year-over-year to $61.75 million. As of September 30, 2023, its total current liabilities came at $171.59 million, compared to $239.60 million as of December 31, 2022.
Analysts expect HNRG’s revenue and EPS for the fiscal year of 2023 (ended December 2023) to increase 107.8% and 215.8% year-over-year to $752.10 million and $1.80, respectively. Moreover, the company surpassed the revenue and EPS estimates in three of the trailing four quarters.
The stock has lost marginally over the past six months to close the last trading session at $8.80.
HNRG’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and a B for Momentum. Within the same industry, it is ranked #4.
Beyond what we’ve stated above, we have also rated the stock for Growth, Stability, Sentiment, and Quality. Get all ratings of HNRG here.
Stock #1: China Shenhua Energy Company Limited (CSUAY)
CSUAY, headquartered in Beijing, China, is involved in manufacturing and selling coal and power, as well as railway, port, and sea transportation and coal-to-olefins enterprises. It operates through six segments: Coal; Power Generation; Railway; Port; Shipping; and Coal Chemical.
CSAUY pays an annual dividend of $1.49 per share, which translates to a dividend yield of 10.25% on the current share price. Its four-year average yield is 11.09%. CSUAY’s dividend payments have grown at CAGRs of 27.8% and 20.9% over the past three and five years, respectively.
Over the past three years, CSUAY’s revenue and EBITDA grew at CAGRs of 14.6% and 14%, respectively. Its EPS grew at 18.1% and 6.2% CAGRs over the past three and five years, respectively.
CSUAY’s forward EV/EBIT of 6.78x is 25.7% lower than the industry average of 9.14x. Its forward EV/Sales multiple of 1.78x is 11.2% lower than the industry average of 2x.
During the nine months ended September 30, 2023, CSUAY’s revenue from goods and services marginally increased year-over-year to RMB 252.47 billion ($35.48 billion). Its profit for the period stood at RMB 61.09 billion ($8.58 billion), while earnings per share registered at RMB 2.64.
As of September 30, 2023, the company’s total current liabilities amounted to RMB 94.43 billion ($13.27 billion), down from RMB 98.40 billion ($13.83 billion) as of December 31, 2022.
CSUAY’s revenue is expected to come at $11.96 billion for the fiscal first quarter ending March 2024. For the fiscal year ending December 2024, its revenue is expected to reach $48.23 billion.
CSUAY has gained 23.3% over the past year, closing the last trading session at $14.50. Over the past six months, it gained 20%.
CSUAY’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
CSUAY has an A grade for Stability and a B for Momentum and Quality. It has topped the same industry.
To access additional CSUAY ratings (Growth, Value, and Sentiment), click here.
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CSUAY shares were unchanged in premarket trading Wednesday. Year-to-date, CSUAY has gained 5.99%, versus a -0.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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