As regular readers probably know, I'm not a big fan of simple relative valuation. That is, if three stocks in an industry trade at a multiple of "20" (whether it's P/E, EV/EBITDA, etc. ... it doesn't matter) and a fourth trades at "14," the fourth is an attractive investment candidate. Well, maybe it is -- but not just because it has a cheaper valuation. Smart Fools know they need to look deeper and explore the why of that relative discount.
With that in mind, I'm a little skeptical about Massey Energy (NYSE:MEE). On the one hand, it looks cheaper than a lot of its peers, particularly given the value of its metallurgical coal assets. On the other hand, maybe the performance that we saw this quarter is suggestive that some sort of discount is in order.
Massey pre-announced a difficult quarter -- and they weren't kidding. While total revenue was down 2%, coal revenue was up just 6% -- on the poorer end of the scale. EBITDA was down, as were operating earnings. And while pricing was up more than 11% per ton on average, the company reported that cash costs per ton had increased 17% as well.
Overall operating performance has been a little challenging here, and there have been other unfavorable developments as well. Sadly, a fire back in January killed a couple of workers, and there was also the matter of the interrupted businesses between Massey and Wheeling-Pittsburgh Steel (NASDAQ:WPSC). Add to that some issues with railroad transport (though I don't know whether NorfolkSouthern (NYSE:NSC) or CSX (NYSE:CSX), or both, are to blame) and it's not the greatest picture around -- even if coal inventories are low and prices are high.
In fact, I'd argue that Massey is a pretty good case in point of how, if you find a cheap-looking stock in a hot industry, there's generally a reason for the valuation. And its not because Wall Street just "forgot" to buy. Of course, you can also take a more optimistic tack and say that there's all the more room for Massey to appreciate if/when it gets its act together.
Personally, I wouldn't want to bet on Massey's quick recovery. At least not when you can find other ideas like Foundation (NYSE:FCL), James River (NASDAQ:JRCC), or income-producing Penn Virginia (NYSE:PVR) -- and spend less time worrying about management execution.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
