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 method. 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. Availability of cheap shale gas in the United States, technological advancement and incentives on usage of renewable energy continue to cut down the popularity of coal as a source of energy. The outbreak of novel coronavirus globally is expected to have a near-term adverse impact on coal demand. The latest report from U.S. Energy Information Administration (“EIA”) forecasts 2020 coal consumption in the United States to fall to 453 million short tons (MMst), indicating 23% decline from 2019 levels of 596 MMst. Demand for electricity from commercial and industrial customers is expected to drop 6.5% each in 2020 due to the coronavirus pandemic, resulting in 24% lower coal consumption by the electric power sector. However, EIA expects United States coal consumption to increase by 10% in 2021 to 498 MMst owing to an expected increase in natural gas prices and an overall economic recovery.
- Amid declining domestic consumption, coal exports have been aiding U.S. miners to gain some lost ground. However, the outbreak of COVID-19 and adoption of various degrees of lockdown had an adverse impact on industrial and commercial activities across the globe. Per EIA, coal export is expected to decline through 2020. Lower coal demand from India, Japan and Egypt due to the ongoing lockdowns will hurt U.S.-based coal producers. Weak demand from the Atlantic market is also making matters worse for U.S. coal producers.
- Per a Mining.com report, global coal production is expected to improve marginally by 0.5% in 2020 from 2019 levels. Despite lower demand for coal in the first half of 2020, gradual removal of lockdown and social distancing norms are expected to boost demand for coal. The majority of the thermal coal plants remained operational during the crisis. The second half of 2020 will likely reflect an increase in coal demand as lockdown relaxes and consumption of coal increases compared with the first half of 2020.
Zacks Industry Rank Indicates Strong Prospects
The Zacks Coal industry is a 12 stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #69, which places it in the top 28% 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 solid 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 top 28% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually showing confidence in this group’s earnings growth potential. Since April 2020, the industry’s earnings estimate for 2021 has gone up by nearly 7.7%.
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 past 12 months.
The stocks in the coal industry have collectively declined 70.7% compared with the Zacks Oil-Energy sector’s decrease of 39.6%. In contrast, the Zacks S&P 500 composite has gained 4.5%.
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 2.93X compared with the Zacks S&P 500 composite’s 10.93X and the sector’s 3.94X.
Over the past five years, the industry has traded as high as 5.39X, as low as 2.74X and at the median of 4.12X.
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector
To Sum Up
Coal companies continue to face hardship with dropping demand in the wake of COVID-19, rising competition from other energy sources and increasing emission awareness over the past few years. At present, higher volumes of coal are produced from mines with minimum human intervention. Though this has a negative impact on job growth in the industry, in the current times, it appears to be a good strategy to lower the possibility of the spread of the virus.
Amid 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. The likely drop in export volumes in 2020 and Federal Trade Commission’s (FTC) administrative complaint challenging the proposed joint venture between Arch Coal (ARCH) and Peabody Energy (BTU) do not bode well for the industry.
The demand for metallurgical coal was adversely impacted as usage of steel dropped globally due to the lockdown. However, governments across the globe have started the process to lift lockdown in phases and allow beginning of commercial and industrial activities with proper social distancing. This will slowly increase usage of steel and revive demand for metallurgical coal, which is essential for producing steel.
At present, among the coal stocks under our coverage, only China Coal Energy Company (CCOZY) sports a Zacks Rank #1 (Strong Buy). Contura Energy (CTRA) hold a Zacks Rank #2 (Buy). Most of the other 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 has lost 44.7% in the past six months and currently has a dividend yield of 3.07%. The Zacks Consensus Estimate for 2020 and 2021 has remained unchanged at $1.19 and $1.26, respectively in the past 30 days.
Price & Consensus: CCOZY
Bristol, TN based Contura Energy has lost 50.7% in the past six months, compared with its industry’s decline of 52.7%. The Zacks Consensus Estimate for 2020 has gone down by 6.7% to a loss of $6.24 in the past 30 days. In the same time frame, the estimate for 2021 moved up by 140.3% to $3.34.
Price & Consensus:CTRA
Canonsburg, PA, based CONSOL Coal Resources LP has a Zacks Rank of 3. The stock has lost 51.1% in the past six months. The Zacks Consensus Estimate for 2020 has gone up by 12.5% to 18 cents in the past 30 days.
Price & Consensus: CCR
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