Coal companies will likely rebound once economic activity, fuel prices, dry bulk rates and currencies normalize, said an analyst on Monday as he recommended a number of coal stocks.
The coal sector lifted Monday as the broader market rallied on upbeat housing and banking news. All three major stock indices were up about 2 percent in mid-afternoon trading. A lift in economic activity signals good news for coal companies as a boost in manufacturing goods means demand for coal will return.
So far demand for coal has been weak, but that has led to US producer supply cuts, which have helped prices and bolstered the sector's stocks, said Jefferies & Co. analyst Michael Dudas. Further cuts will continue to push long-term contract coal prices higher than expected.
Demand for metallurgical coal continues to suffer as raw steel production, which uses met coal, has fallen 50 percent year over year. Still, the metallurgical coal market has adjusted quickly, he noted, with over 40 million tons of announced global supply cuts.
Thermal coal demand is also under pressure, driven by a pullback in energy consumption by industrial users, high utility stockpiles, lower exports and fuel switching, Dudas said.
As a result of the sharp decline in industry demand, coal stocks have tumbled, creating attractive investment opportunities, Dudas said. Also, Alpha Natural Resources Inc.'s acquisition of Foundation Coal Holdings Inc., speculation that U.S. and global economies have bottomed and rising industrial energy demand all signal good news for coal stocks, he added.
Dudas recommended buying shares of Consol Energy Inc. and Peabody Energy Corp., his favorite large coal producers. He rates both "Buy."
Shares of Consol climbed $2.60, or 7.6 percent, to $36.99 in afternoon trading. Peabody shares rose $1.51, or 5.2 percent, to $30.45.
Among smaller capitalized producers Dudas rated both Massey Energy and James River Coal Co. "Buy." Shares of Massey rose $1.48, or 8 percent, to $20.03, while James River gained $1.80, or 9.3 percent, to $21.24
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