Most of us grew up with the notion that if we were good boys and girls, Santa would bring us all the gifts we wished for. Bad boys and girls would get coal in their stockings. Well let me tell you, if that's the case, I want to be bad this Christmas!
Coal may not share the clean by-product benefits of energy plays in the solar and wind sector, but it remains a readily viable and still predominantly inexpensive energy play that could put the gift of extra profits in your portfolio. This holiday, one company stands out above the competition; but you don't have to wait two and a half long weeks to find out what is under the wrapping.
Digging up profits
Arch Coal
|
Company |
Price to Sales |
Forward Price to Earnings |
|---|---|---|
| Arch Coal | 1.80 | 12.6 |
|
Consol Energy |
2.05 | 15.8 |
|
Peabody Energy |
2.58 | 13.8 |
|
Massey Energy |
1.82 | 15.2 |
Normally, it's incredibly tough to choose which coal company is the better value, as they tend to move in accordance with the underlying commodity. In this case, these metrics stand out like a sore thumb in demonstrating that, all things equal, Arch Coal is being discounted relative to the group and may make for the better play if coal demand remains strong.
No news is good news
Arch has a significant advantage right now in that it has no legal or governmental baggage hampering its operations. Massey is still dealing with the legal ramifications from a disastrous April 2010 explosion at one of its mines in West Virginia, as healthy profits turned into sizable losses. Likewise, many Chinese coal producers find themselves in a precarious position as the Chinese government continues to meddle with their day-to-day activities by trying to control coal exports and cap coal prices. As silly as the logic might seem, a company can become the best simply by not being the worst. Arch has kept itself out of legally compromising situations and maintained a very good safety record.
It's all in the margins
Coal's price really doesn't matter if Arch can't keep its costs under control. In the third quarter, Arch's margins saw a significant boost largely due to lower operating expenses and a higher selling price per ton for its coal. Not surprisingly, these higher margins caused Arch to adjust the midrange of its full-year outlook higher.
Arch Coal's story finishes up with impressively strong cash flow from operations that helps to finance its 1.2% dividend, a dividend that has been raised five times in the past decade.
At a glance, Arch Coal appears to be the most well-rounded coal producer. I've put my stocking out for Santa's arrival, now I can only hope I've been bad enough to get a lump of Arch Coal this Christmas.
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