4 Stocks to Keep a Close Watch From the Coal Industry

The Zacks Coal industry stocks are suffering due to a decline in the use of coal in thermal power plants in the United States. In 2024, the demand for coal will be adversely impacted by the planned retirement of coal units and the utilization of more renewable sources for electricity generation. The ongoing energy transition, with utility operators steadily phasing out coal units, may hit the coal industry. Then again, the continuing conflict between Russia and Ukraine is creating fresh demand from European coal-importing countries. Despite a drop in coal production, export volumes are likely to boost the prospects of coal stocks like Peabody Energy BTU. Other coal stocks like Arch Resources ARCH, SunCoke Energy Inc. SXC and Ramaco Resources, Inc. METC, with high-quality met production volumes, are expected to gain during this difficult phase.

About the Industry

The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined through the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity and manufacture steel and cement. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many years. Five states in the United States contribute 70% of the yearly production of coal and 60% of the coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry.

3 Trends Likely to Impact the Coal Industry

U.S. Coal Production and Price Rises: Per EIA’s projection, coal production in the United States is expected to drop in 2024 and 2025. EIA projects U.S. coal production to decline 14% from 2023 levels to about 500 million short tons (MMst) in 2024 and register a decline of nearly 5% to 475 MMst in 2025 due to the expected reduction in coal usage in electricity production. EIA projects 2024 coal price to increase by a cent from the 2023 level to $2.53 per million British thermal unit (Btu). This would encourage coal operators as they fight a tough battle against other cleaner sources of energy.

Despite Reliability, Emission Policy to Hurt Coal Industry: Coal is still a reliable source of energy and ensures 24x7 electricity production from the generation units. However, increasing emission concerns are resulting in reduced usage of coal in electricity generation. The United States’ Sustainability Plan includes an aim toward transitioning to 100% carbon pollution-free electricity by 2030 and achieving net-zero emissions by 2050. Utility operators are now focused on generating more electricity from clean energy sources, lowering coal usage and gradually shutting down the existing coal-based electricity generation units. Per EIA, the share of coal in U.S. electricity generation would drop from 17% in 2023 to 16% in 2024.Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will continue to drop. Coal industry operators should brace themselves for challenges as several electric utilities have decided to become carbon neutral and are aggressively cutting down on coal usage. Coal-fired units are gradually becoming backup units for utility operators in case of emergency power requirements, and 12 GW of coal-fired electricity generating capacity are going into retirement.

Coal Industry To Experience Softness in Exports: Despite an expected drop in coal production volumes, coal operators in the United States benefited from the stable and rising coal export volumes. However, EIA projects coal exports from the United States to drop by 6% in 2024 from the 2023 level.  The collapse of the Francis Scott Key Bridge and the resulting closure of the Port of Baltimore impacted coal export volume. Coal export volumes are expected to improve with the reopening of the Port of Baltimore. The World Steel Association forecasts a rebound in global steel demand, rising 1.7% in 2024 to touch 1,793 metric ton (Mt) and further increasing by 1.2% in 2025 to reach 1,815 Mt. Steel production requires ample high-quality coal, and nearly 70% of global steel production depends on it. With the continued recovery in steel demand, coal exports are expected to pick up and improve in the long run.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Coal industry is a nine-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #102, which places it in the top 41% out of 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster 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 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have confidence in this group’s earnings growth potential. Since May 2024, the coal industry’s earnings estimates for 2024 have increased 10.4% to $3.92 per share.

Before we present a few coal stocks that you may want to keep track of, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 but Outperforms Sector

The Zacks Coal industry has lagged the Zacks S&P 500 composite but outperformed the Zacks Oil and Gas sector over the past year.

The stocks in the coal industry have gained 15.3% compared with the Zacks Oil-Energy sector’s rally of 8.2%. The Zacks S&P 500 composite has gained 28.8% in the same time frame.

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 a trailing 12-month EV/EBITDA of 4.34X compared with the Zacks S&P 500 composite’s 18.58X and the sector’s 3.16X.

In the past five years, the industry has traded as high as 7.6X, as low as 2.01X and at the median of 4.26X.

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500

 

Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector

 

4 Coal Industry Stocks to Keep a Close Watch On

Peabody Energy: St Louis, MO-based Peabody Energy engages in the coal mining business and has thermal and metallurgical operations. In 2023, nearly 25% of the company’s revenues were derived from five customers with whom it still has 13 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2024 to 2025. This assures a steady flow of revenues.

The Zacks Consensus Estimate for Peabody Energy’s 2024 and 2025 earnings per share has moved up by 41.4% and 16.2%, respectively, over the past 60 days. The current dividend yield of the company is 1.32% compared with the industry yield of 0.26%. Peabody Energy currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BTU

Arch Resources Inc.: St. Louis, MO-based Arch Resources produces and sells metallurgical and thermal coal. The company commenced longwall production at the Leer South mine, which will add high-quality 3 million tons of metallurgical coal annually to its total production. The ongoing rebound in production in the steel industry will create fresh demand for met coal supplied by the company.

The Zacks Consensus Estimate for its 2024 earnings per share indicates a decline of 0.7% in the last 60 days, while the earnings estimate for 2025 in the same period indicates an increase of 5.4%. The current dividend yield is 0.78%. Arch Resources carries a Zacks Rank #3 (Hold) currently.

Price and Consensus: ARCH

SunCoke Energy: Lisle, IL-based SunCoke Energy is a raw material processing and handling company serving steel and power customers, with principal businesses in coke making and logistics. With an annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal exports and increasing demand for met coal from the steel industry. The company plans to invest in the range of $75 million to $80 million in 2024 to expand its operations.

The Zacks Consensus Estimate for its 2024 earnings per share indicates an increase of 4.4% in the last 60 days. The current dividend yield of the company is 4.58%. The stock has gained 15.8% in the past six months. SunCoke Energy carries a Zacks Rank #3 at present.

Price and Consensus: SXC

Ramaco Resources, Inc.: Lexington, KY-based Ramaco Resources is the developer of high-quality, low-cost metallurgical coal and is poised to benefit from improving metallurgical coal demand. The company now expects its 2024 production volume to be 4 million tons and expects production to increase by more than 25% from the 2023 levels. Depending on demand, the company can increase coal production volumes from the current levels.

The Zacks Consensus Estimate for its 2024 earnings per share indicates a decline of 0.7% in the last 60 days, while the earnings estimate for 2025 in the same period indicates an increase of 5.4%.  The current dividend yield of the company is 4.28%. Ramaco Resources currently has a Zacks Rank of 3.  

Price and Consensus: METC

 

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