The coal sector has gained traction over the past year due to geopolitical tensions and unprecedented economic conditions. However, with several countries worldwide making ambitious climate pledges, keeping an eye on the industry’s long-term prospects is essential.
In this context, I have discussed why fundamentally sound coal stocks, China Shenhua Energy Company Limited (CSUAY), and CONSOL Energy Inc. (CEIX) could be solid buys this month, while investors should wait for a better entry point in Peabody Energy Corporation (BTU).
In recent news, the coal industry faces a complex landscape in 2023. The United States, one of the largest coal consumers, is expected to continue its shift toward renewable energy sources, leading to a decline in demand for coal.
However, the ongoing conflict between Russia and Ukraine might continue to create fresh demand from coal-importing countries, which could boost U.S. coal exports.
The latest data shows that coal consumption in the United States fell by 13.4% from the fourth quarter of 2022 to the first quarter of 2023 and by 25% year-over-year. However, U.S. coal exports of 24.6 million short tons increased 17.2% sequentially.
It is important to note that the coal industry faces increased scrutiny and pressure from environmental groups and governments to transition toward cleaner energy sources.
Over the coming decades, several countries have rolled out climate strategies to decarbonize their economies. However, with gas shortages and a long road ahead to meet global demand for renewable energy, many countries rely on coal for power and industry.
While coal use is expected to decrease in the long term, demand is set to remain robust in 2023, particularly in emerging and developing economies in Asia. These countries are expected to increase coal use to help power their economic growth, even as they add more renewables.
According to a U.S. Energy Information Administration (EIA) report, as of last year, the estimated U.S. recoverable coal reserves are about 251 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources will likely last many more years.
The global coal market grew from $614.96 billion in 2022 to $621.89 billion in 2023 at a CAGR of 1.1%. Furthermore, the coal market is expected to grow to $658.68 billion in 2027 at a CAGR of 1.4%.
Given this backdrop, we believe investing in CSUAY and CEIX, poised to gain from the industry’s tailwinds, could be wise. On the other hand, investors could keep an eye on BTU in the coming weeks.
Stocks to Buy:
China Shenhua Energy Company Limited (CSUAY)
Based in Beijing, China, CSUAY produces and sells coal and power; railway, port, and shipping transportation; and coal-to-olefins businesses. The company is a subsidiary of China Energy Investment Corporation Limited and operates through six segments: Coal; Power Generation; Railway; Port; Shipping; and Coal Chemical.
On June 25, Xinshuo Railway launched China’s first Rail Transport and New Energy Integrated Power Supply project. The project aims to develop a new energy supply system for rail transport, which will reduce carbon emissions and improve energy efficiency.
The project would use wind, solar power, and energy storage technology to prove a reliable and sustainable power supply for rail transport. As a result, this project provides opportunities for the company to participate in developing new energy infrastructure and contribute to China’s efforts to reduce carbon emissions and promote sustainable development.
In the same month, CSUAY was recognized as one of China's Top 100 ESG Pioneer Listed Companies, ranking second in the mining industry. On top of it, it won seven WIND awards, including WIND HKEX ESG Best Practice Award 2022.
Such recognition reflects the company’s significant progress in ESG concepts, governance systems, information disclosure, and capacity building, enhancing its competitiveness and guiding traditional energy industries and listed central SOEs.
In terms of forward EV/Sales, CSUAY is trading at 1.43x, 26.7% lower than the industry average of 1.95x. Its forward EV/EBITDA and EV/EBIT multiples of 4.26 and 5.13 are 18.9% and 38.1% lower than the industry averages of 5.25 and 8.30, respectively.
The company’s annual dividend translates to an 11.93% yield, while its four-year average yield is 10.38%. Its dividend payouts have grown at CAGRs of 27% and 20.5% over the past three and five years, respectively.
For the fiscal first quarter that ended March 31, 2023, CSUAY’s revenue increased 3.7% year-over-year to RMB87.04 billion ($12.01 billion). The company’s attributable profit for the period rose marginally from the year-ago value to RMB23.59 billion ($3.25 billion), while its earnings per share stood at RMB1.04, up 4.3% from the prior-year quarter.
Also, it reported a 2.7% year-over-year increase in its net cash generated from operating activities of RMB29.20 billion ($4.03 billion). As of March 31, 2023, its total current assets increased 10.3% from RMB211.05 billion ($29.12 billion) for the period that ended December 31, 2022, to RMB232.77 billion ($32.11 billion).
Analysts expect CSUAY’s revenue for the third quarter (ending September 30, 2023) to increase marginally year-over-year to $11.77 billion. It is expected to reach $47.61 billion and $48.34 billion in the fiscal years 2023 and 2024, respectively.
CSUAY’s shares have gained 6.8% year-to-date to close the last trading session at $11.99.
CSUAY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has a B grade for Momentum, Stability, and Quality. Out of ten stocks in the A-rated Coal industry, it is ranked #2. Click here to see the additional ratings for CSUAY (Growth, Value, and Sentiment).
CONSOL Energy Inc. (CEIX)
CEIX is a producer and exporter of high-Btu bituminous thermal coal and metallurgical coal. The company owns and operates longwall mining operations in the Northern Appalachian Basin. It operates through two segments: The Pennsylvania Mining Complex (PAMC); and CONSOL Marine Terminal.
On May 23, at the board of directors' discretion, CEIX paid the previously announced dividend of $1.10 per share, representing approximately 17% of the free cash flow generated in the first quarter of 2023. The payment amounted to an aggregate of about $37.3 million.
CEIX’s four-year average yield is 0.87%, while its annual dividend translates to a 6.48% yield on the prevailing prices.
In terms of forward non-GAAP P/E, CEIX is trading at 3.08x, 66.2% lower than the industry average of 9.11x. Its forward EV/EBITDA multiple of 2.11 is 59.8% lower than the industry average of 5.25. In addition, the stock’s forward EV/EBIT ratio of 2.67x compares to the industry average of 8.30x.
CEIX’s total revenue and other income increased 92.1% year-over-year to $688.61 million for the first quarter (ended March 31, 2023). The company’s net income and EPS amounted to $230.38 million and $6.55 compared to a net loss and loss per share of $4.45 million and $0.13, respectively, in the same period last year.
Also, its adjusted EBITDA improved 104.6% from the prior-year quarter to $346.30 million.
The consensus revenue estimate of $588.30 million for the second quarter (ended June 30, 2023) represents an 8% increase year-over-year. The consensus EPS estimate of $4.66 for the current quarter indicates a 30.4% year-over-year growth. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is promising.
The stock has gained 12.3% over the past three months to close the last trading session at $66.59
CEIX’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value and Momentum. It is ranked #3 among ten stocks in the same industry. To see the other ratings of CEIX for Growth, Stability, and Sentiment, click here.
Stock to Watch:
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 partnered 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.
Last month, BTU updated that it had completed the safe sealing of two longwall panels in the J panel area of the Shoal Creek Mine, which was impacted by a fire in March. The company is now resuming the development of coal production in the new L panel area, where better mining conditions are anticipated.
BTU expected to receive a new longwall kit at the end of the year, which will further boost its operations. The incident will not likely have a material impact on the company's 2023 financial results.
On May 31, the company paid a quarterly dividend on its common stock of $0.075 per share. BTU’s four-year average yield is 5.39%, while its annual dividend translates to a 1.38% yield on current prices.
In terms of forward non-GAAP P/E, BTU is trading at 3.27x, 64.1% lower than the industry average of 9.11x. Its forward EV/Sales multiple of 0.54x is 72.3% lower than the industry average of 1.95x. In addition, the stock’s forward EV/EBIT ratio of 2.32x compares to the industry average of 8.30x.
BTU’s revenue for the fiscal first quarter ended March 31, 2023, increased 97.3% year-over-year to $1.36 billion. The company’s operating profit and attributable net income amounted to $404.50 million and $268.50 million, compared to an operating and net loss of $70.60 million and $119.50 million in the prior-year quarter.
Also, its net income per share came in at $1.68 versus a loss per share of $0.88 in the same period last year. In addition, its adjusted EBITDA increased 19.3% from the year-ago value to $390.60 million.
Street expects BTU’s revenue and EPS for the second quarter (ended June 30, 2023) to be $1.24 billion and $1.90, respectively. Moreover, the company surpassed the revenue estimates in three of the trailing four quarters.
However, for the fiscal year 2023, its revenue and EPS are expected to decrease 1.5% and 24.8% year-over-year to $4.91 billion and $6.63, respectively.
Over the past year, the stock has gained 13.7% to close the last trading session at $21.33. But it has declined 19.3% year-to-date.
BTU’s POWR Ratings reflect this prospect. It has an overall rating of C, equating to Neutral in our proprietary rating system.
It has an A grade for Value and a B for Momentum and Quality. Within the same industry, it is ranked #6. Click here to see the other ratings of BTU for Growth, Stability, and Sentiment.
Is the Bear Market Over?
43 year investment veteran Steve Reitmeister shares his updated stock market outlook & top picks for the rest of 2023. Spoiler Alert: Steve still believes bear case most likely.
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CSUAY shares were trading at $12.08 per share on Friday afternoon, up $0.09 (+0.75%). Year-to-date, CSUAY has gained 16.58%, versus a 16.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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