Building on Foundation

Well, here we go. I've talked about other large coal companies like Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI), and mentioned that Foundation Coal (NYSE: FCL) was also worth a look. So now I'll follow my own advice and see what was up with Foundation this quarter.

Once again, revenue growth was solid. Coal revenue rose 29% as the company coupled higher shipments (up about 7%) with better price realizations (up about 20% per ton). And once again, profitability also improved -- EBITDA was up 31% this quarter and net income rose 66%. That's not particularly surprising to me -- Foundation has stood out before as an above-average coal company when it comes to margins.

By and large, with a coal company, you don't really want a lot in the way of news from one quarter to the next, since most of the big changes in any given period are apt to be bad ones. Still, it looks to me like the company continues to move ahead with capacity expansions like the one at Belle Ayr, which should boost production there by about one-quarter. And let's also not forget that many utilities are still working on installing scrubbing equipment, which could ultimately make the company's Northern Appalachian coal more appealing.

Now, for the things I don't like so much. First, Foundation's reserve life is declining and is presently at about 26 years, with a replacement rate of less than 100%. Second, the company has a large percentage of its coal locked up in contracts -- 96% of anticipated production in '06 and 83% for '07. While that certainly offers a floor should coal prices decline precipitously, it also gives them less exposure to ongoing price increases.

Unfortunately for prospective owners, these shares had a nice jump in April and they're no longer dirt cheap. Still, there is relative value here, and this is a name that I plan on keeping a close eye on in case we get another little swoon like we saw in February. In the meantime, more income-oriented Fools might want to take a gander at Penn Virginia (NYSE: PVR) and Natural Resource Partners (NYSE: NRP).

For more coal-fired Foolishness:

• Is Coal Burning Out?
• Peabody Still Mining Money
• Arch Coal Investors Are Stoked

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).