MEE - Which Coal Stock Will Outperform?

 

Massey Energy

Earnings Date: Apr. 21 (after the market close)

First Quarter 2010 EPS: 39 cents earnings per share (39.3% outperformance of Street consensus of 28 cents)

50-Day Moving Average: $48.53

Share Price Gain or Loss on Day of Last Earnings (Apr. 21): 17 cents (gain)

Lowest Share Price Since Last Earnings: $41.30 (Apr. 22)

Highest Share Price Since Last Earnings: $44.70 (Apr. 23)

Earnings Issues and Factors to Note: For the past month, Massey Energy(MEE) has been in the news for all the wrong reasons -- those reasons all stemming from the accident at the company's Upper Big Branch Coal mine in West Virginia.

And on Wednesday -- when Massey reported a decline in both earnings and revenue for the first quarter, while forecasting a range of loss of $80 million to $150 million for charges related to the benefits being provided to families of the fallen miners -- the company could offer little in the way of positives with which to change the conversation.

The report sounded grim and the stock plunged the morning after it was released. But analysts believe that hope lies ahead for Massey through its recently completed, $960 million acquisition of mine operator Cumberland Resources.

"The release itself has to be viewed somewhat negatively," BMO Capital Markets analyst Meredith Bandy said. "But I think at the end of the day the Cumberland acquisition is still a positive for the stock." She adds, "if you say that [the stock] is down 10% to 15%, that's [the mining accident impact] already priced into the stock. Much of it is already in the stock." Bandy is assuming that the mining accident will have little impact on met coal prices, for the sake of conservatism; but, in reality, pricing is already higher than it was before the accident.

Bandy notes that in the near term, the Cumberland acquisition should have a moderate effect for Massey; mostly just through bringing on already-priced thermal coal (which is not as profitable as met coal). But in the longer-term, the acquisition will allow Massey Energy to upgrade to coal that would be sold in the met market through 2011 and 2012. "It's going to be able to provide significant upside for years out," S&P analyst Mathew Christy agreed.

For the second quarter, Christy sees an estimated 12% increase in year-over-year Massey coal volumes per ton, which accounts for Cumberland. He also sees a slight uptick in overall average pricing, excluding the charges to be taken for the Upper Big Branch accident.

Operations are improving for everyone "as older contracts start to roll off and you see improved met coal pricing," Bandy said.

Which Coal Stock Will Outperform? -MEE

Andrea Tse

04/26/10 - 10:23 AM EDT

NEW YORK (TheStreet) -- General weakness persists in the thermal coal markets; "we are still seeing some production push-backs and relative oversupply," in that area, according to S&P analyst Mathew Christy.

Still, many coal companies and industry analysts remain confident that growth opportunities for the coal sector remain plentiful, given the strength in the metallurgical coal markets this year -- fueled by the red-hot emerging economies, the hungry steel companies that supply these companies and tightness of met-coal supplies, especially in the Asia-Pacific regions.

Also of note is that electricity demand should firm-up along with the recovering the global economy, which would increase the need for thermal coal.

In light of all this, we've provided TheStreet readers with a preview of six coal stocks to mine for profits. But now it's your turn to tell us which one of them you think will outperform the sector.

Here's a taste of the stocks that we previewed for this week ...

Analysts are expecting a largely positive earnings report for Walter Energy's(WLT) first quarter 2010 due to its predominant exposure to the metallurgical coal market -- widely expected to be a more profitable coal category to be in. Walter Energy entered the quarter with significant un-priced met, but reports say the company is now pricing much of the met at $240 to $250 a ton -- a strong price point, according to BMO Capital Markets analyst Meredith Bandy.

For the past month, Massey Energy(MEE) has been in the news for all the wrong reasons -- those reasons all stemming from the accident at the company's Upper Big Branch Coal mine in West Virginia. And on Wednesday -- when Massey reported a decline in both earnings and revenue for the first quarter -- the company could offer little in the way of positives with which to change the conversation. But analysts believe that hope lies ahead for Massey through its recently completed, $960 million acquisition of mine operator Cumberland Resources.
 

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In July 2009, Alpha Natural Resources(ANR) and Foundation Coal announced the completion of a merger. The new company retains the name Alpha Natural Resources and became, overnight, the third-largest coal producer in the U.S., with 2008 pro forma revenues of $4.2 billion.

Negative productivity trends stemming from potential legislation or regulation following the Massey Upper Big Branch Coal mine accident in West Virginia will be an issue that investors will be look out for when International Coal(ICO) releases its first quarter 2010 earnings call. Still, Tian notes that fairly high metallurgical realizations to come point to a decent quarter for International Coal.

Natural Resource Partners(NRP), for its part, is a limited partnership formed in April 2002, engaged primarily in the business of owning and managing coal properties. "Based on the growth plans of the coal group, all of the lessees of NRP are ramping up their met coal production, which bodes well for NRP," FBR Capital Markets analyst David Khani said in an investor note.

On Apr. 23, Patriot Coal(PCX) reported first quarter net income of $4.261 million, or 5 cents a share, down from $32.143 million, or 41 cents a share the year before. Still, UBS analyst Shneur Gershuni wrote in an investor note that he still holds a stronger outlook on the company's earnings per share as a result of Patriot Coal's enlarged met-coal business and strong booked business among other factors.

In light of the overview of all of these coal mining stocks -- and of the bullish signs for the coal industry -- which coal mining stock do you think will outperform the sector in the coming quarter? Take our poll below to learn the consensus of TheStreet.