Shares of Peabody Energy
How it got here
Yesterday's 1% drop wasn't driven by anything new, rather a long slow decline has plagued shares. The long-term trend has been declining demand for coal in the U.S., as domestic coal consumption has fallen to levels we haven't seen since 1996. With natural gas at rock-bottom prices and renewable energy growing faster than any other energy source, coal is the odd man out. I wouldn't expect the domestic trend of a slow decline to change anytime soon, although emerging market demand may pick up some slack.
Across the board, coal stocks have been on a downward path for the past year. Patriot Coal
You could make the argument that on a fundamental basis these stocks look pretty cheap, but that hasn't had the market buying into the future of coal.
|
Company |
Market Cap |
Price/Book |
Operating Cash Flow (TTM) |
Forward P/E |
|---|---|---|---|---|
| Peabody Energy | $7.46 billion | 1.35 | $1.63 billion | 6.7 |
| Patriot Coal | $539 million | 0.76 | $124.7 million | n/a |
| Cloud Peak Energy | $910.59 million | 1.19 | $296.8 million | 7.5 |
| Alpha Natural | $3.3 billion | 0.42 | $686.6 million | 187 |
| Arch Coal | $2.1 billion | 0.60 | $642.2 million | 10.6 |
Source: Yahoo! Finance. TTM = trailing 12 months.
Trends drive coal's performance
China and India drove an overall increase demand for coal and corresponding exports from the U.S. and Australia in 2011, but demand for these exports is down, and China has been adding supply to both coal and natural gas rapidly to meet its energy needs. That's led the price of Australian thermal coal to fall since the beginning of 2011, and U.S. spot prices are on the decline as well. China is a lot of things -- but dependent on others isn't usually one of them.
China's overall demand may head higher in the foreseeable future, but I wouldn't bet on imports increasing, as natural gas fracking and coal production expand in China to meet both energy and metallurgical coal needs. Combine that with the fact that the U.S. is slowly turning away from coal, and the trends aren't favorable for the industry right now.
What's next?
The future of coal as an investment is uncertain at the very least. I argued last week that coal is last century's power source and isn't worth betting on now. Fellow Fool Sean Williams took the opposite stance, saying he sees a lot of value in coal stocks at these prices.
Determining whether bears or bulls win the coal battle will likely come down to China's energy and steel usage, its coal production, and the number of mines shutting down. As the industry purges high-cost supply -- which Patriot Coal has already begun doing -- the balance between supply and demand may come into line, raising prices. But that's not a bottom I would like to bet on, so I'm staying out of this trade and sticking to energy sources that are growing, like natural gas and solar.
