Bash My Stock: Patriot Coal

The concept here is simple: Take a well-liked company on Motley Fool CAPS and completely debunk the notion that it's worth buying. Does this mean that after I put a company through the ringer it's worth selling? Maybe, maybe not -- that's up to you to decide. The point of Bash My Stock is to expose the fact that there's another side to every trade, and this series will attempt to look at the bearish view of why a stock might not be such a great value after all. Today I suggest we take a closer look at Patriot Coal (NYSE: PCX  ) .

Like many of its coal peers, Patriot Coal has seen its share price tumble to multiyear lows on concerns over lower demand and weakening prices. This move lower has many investors wondering if now is the right time to buy into coal stocks with many now trading at or near 52-week lows.

Out of the 872 Motley Fool CAPS participants who have weighed in on the stock, 841 have rated it as a buy. Since it's currently hovering right at book value and at seven times forward earnings projections, Patriot Coal optimists could be witnessing a once-in-a-lifetime buying opportunity. Then again, they could also be looking at a lump of coal. Patriot Coal bulls, it's time for me to bash your stock.

My first stab at the company relates to its inability to produce coal. I'll concede that coal production is a dangerous business where safety is a priority, but within the past year and change, things have really gone awry. The company's Harris mine has been closed permanently, its Panther and Federal mines have both suffered from challenging geology and equipment downtimes, and another one of its thermal coal mines experienced a roof collapse in August. Patriot's Federal mine, which is its highest-yield, lowest-cost mine, was also shut down twice in 2010.

If the company can't produce coal, it can't make money -- plain and simple. Over the past year, Patriot's actual earnings (or in this case, losses) missed analyst projections three times. Even worse, the company hasn't been cash-flow positive since 2005 -- and even then it was only positive by a marginal amount.

Compare these figures to those of almost any other coal company in the sector and it'll leave you scratching your head. Peers Arch Coal (NYSE: ACI  ) and James River Coal (Nasdaq: JRCC  ) are both profitable and trading below book value. Other rivals like Peabody Energy (NYSE: BTU  ) and CONSOL Energy (NYSE: CNX  ) may not be as cheap on a book basis, but they more than make up for it by turning a profit -- something Patriot Coal hasn't done often recently.

For the knockout blow I'll let the conviction of insiders do the talking for me. Within the past six months, insiders have purchased 400 shares while selling ... wait for it ... 12.7 million shares. You can turn to Arch, Alliance Resource Partners (Nasdaq: ARLP  ) , Peabody, or CONSOL and get in some cases a substantial dividend. Any idea what Patriot rewards its shareholders with? Zilch! If you want a dividend, you'll need to look elsewhere.

From the facts above I have enough reason to peg Patriot Coal as an underperform moving forward. Now it's your turn to sound off by voting in the poll below and explaining your reasoning in the comments section. Also, feel free to suggest the next company you'd like to see "bashed" and you may just wind up getting mentioned in the next Bash My Stock installment.

Craving more input on Patriot Coal? Consider adding it to your free and personalized watchlist to keep up on the latest news with the company.  

Fool contributor Sean Williams has no material interest in any companies mentioned in this article, but would welcome a lump of coal in his stocking from Santa this Christmas. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that'll always put a roof over your head.


Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 12:51 PM, gwhitebeard wrote:

    32 million ton projection is hardly an "Inability to produce coal". PCX also moves with the coal sector and is included in multiple energy and coal producing ETF's. There has also been significant recent insider share purchasing. Everyone talks about "China Cooling off", however a "China Cooling" means a drop from 10% growth to 7-8 percent. Add it all up and the coal sector is a screaming buy with PCX a doubler by January (IMHO).

  • Report this Comment On September 26, 2011, at 1:06 PM, TMFUltraLong wrote:

    gwhitebeard,

    Insider buying? Where? Insiders are running away from the stock kicking and screaming over the past six months.

    My beef with the projections is that Patriot Coal never ever seems to hit them. It produced roughly 8.1 million tons last year and this quarter is expecting a 450k reduction in output due to geological and equipment delays. That's a huge production chunk missing. Production costs are up and Patriot can't turn a profit.... just sayin'...

    TMFUltraLong

  • Report this Comment On September 26, 2011, at 1:52 PM, moseywood wrote:

    PCX has 20 yr old legacy contracts finally expiring one end of this year and other one next year. This will add $1.50 to 2 in new ebitda, maybe more!!!!!! !!!!! COO bought 360,000 shares at $12 last week . Temporary geology issues are to do with longwall re-positioning only one quarter issues here. this stock is stupid stupid over sold.!!!!!!!!!

  • Report this Comment On September 26, 2011, at 2:52 PM, HoldThatWinner wrote:

    I played PCX last year, but I am going with Arch Coal this year at these levels. The metrics look better for ACI compared to it's peers. Book value, PE, earnings, and potential growth all look better to me.

    Plus I like that juicy dividend while I wait.

  • Report this Comment On September 26, 2011, at 3:38 PM, gwhitebeard wrote:

    TMFULTARLONG - You are looking at Quarterly output (8.1million tons) not Annual and the 450,000 ton estimated shortfall = less than 2%. Stock recently dropped over 10%. As far as Insider selling, only a fool wouldn't sell at $23.00 after a run up from $3!!! Point is we are ready for another Coal play.

  • Report this Comment On September 26, 2011, at 4:42 PM, sadmadmax wrote:

    I think JRCC is a better Buy.

    Makes a decent Profit and is Priced Below Book Value. I own both PCX and JRCC, but I am more Bullish on James River Coal.

  • Report this Comment On September 27, 2011, at 8:48 AM, inewton55 wrote:

    PCX has a lot of metalurgical coal that others do not. Once the global econmy starts to recover and steel demand increases, PCX will rise faster than others.

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