Specific to coal, I went bullish in September 2007 calling it the forgotten commodity - the stocks were flailing back then and generally ignored as people ran into every other commodity. [Dec 6: Coal Stocks Quitely in a Bull Market] Much like fertilizer was ignored up to about 4 months ago. Now coal is becoming sexy all the sudden. But much like fertilizer I believe "out year" analysts expectations are far too low now.
I already have a basket of 4 pure play coal names, and other names with some ancillary coal exposure. So I don't want to add 1 more and continue on a path of portfolio bloat. So I have to make a very tough decision. I want to add Alpha Natural Resources (ANR) due to it's heavy metallurgical coal exposure, along with a lot of non contracted supplies in 2009. So something has to go. I don't have any great reason to drop Peabody Energy (BTU) which I like due to its Australian operations (in conjuction with its main US business), so it's relatively random. The stock has been underperforming the group a bit of late, but that does not mean it won't be the best performer going forward - this is why I buy a basket. I don't know which one will perform the best - but a rising tide lifts all boats... so again, this decision is nothing company specific and if I wanted a portfolio of 100 names I'd buy about 3 more coal names, but 4 should do the same trick 7 will do.
Now let me explain why I want Alpha Natural Resources (ANR) in the fund. I've been looking at this name for the past few weeks... ironically just when I was going to buy it, it priced a secondary offering with convertible notes to boot. Normally I hate convertibles but the story here is so good I am going to ignore that. With the money raised (already priced - and oversubscribed!), it looks like the company is going to be acquiring some assets in coal as it expands its business, which the market might treat negatively in the short run but thats the market being short sighted as usual - so when the announcements are made of some acquisitions - the stock might fall temporarily. But for the long run acquiring resources that are going up sharply in price is never a bad thing.
- Coal producer Alpha Natural Resources Inc (ANR.) is actively looking for companies and reserves to acquire, President Kevin Crutchfield said on Monday. "We were actively looking at acquisition opportunities ..." Crutchfield told analysts at the April 6-10 Howard Weil Energy Conference in New Orleans, adding that his company was set to benefit from high coal prices.
- Crutchfield said his company has 19 million tons of planned 2009-2010 metallurgical coal production uncommitted and unpriced, as well as 25 million tons of thermal coal production over the same two-year period that was also uncommitted and unpriced.
- Alpha supplies Appalachian coal to electric utilities, steel producers and heavy industry and is the largest U.S. supplier and exporter of metallurgical coal. Alpha and its subsidiaries operate 58 mines in four U.S. states.
And in that last bullet point above is why Alpha Natural Resources needs to be part of the portfolio. While thermal coal is also set to rise, and each company has some exposure to thermal AND metallurgical, the increases in metallurgical are simply stunning (+200%). I have been using Massey Energy (MEE) as my proxy on metallurgical coal, and we've seen how that stock has reacted the past few days [Apr 4: Massey Energy Flying on Higher Met Coal Prices].... I believe ANR (which is the largest metallurgical US producer) has been more subdued due to this offering but when I analyzed the 2009 production of both that is not priced yet, ANR actually has the advantage.
Looking at their most recent earnings releases, Alpha Natural Resources stated that 8 million tons of their metallurgical coal (which goes into steel) has not been priced - considering they produced 11 million in 2007 this is a huge majority.... further 2/3 of their 2009 thermal coal is not yet priced. So why do we care about that? Well contracted coal already has it's price set... so even as the spot market for a commodity increases you cannot take advantage of it. Sort of like the drybulk shippers - some rely on long term contracts, some take the risk of being unhedged and relying on spot prices (which fluctuate up and down). The difference in the coal market, the trend is 1 direction - up. So those with a lot less committed 2009 production are going to see huge increases in earnings potential in 09. So I am going to be buying now before the world catches up to this idea.
Compare ANR's position to Massey Energy, which as I stated above, is also in great shape. Of 44-46M tons in 2009, 10M is unsold (6M of which is metallurgical). So that's over 25% of production unhedged... which provides upside... but as a % of total production Alpha Natural Resources has a far greater amount unhedged. So again, this is a rising tide, and picking among multi million mansions - you can't go wrong (versus picking among the scrabble in financials which is like picking among the best run down shack). But I do think this stock has some great upside as incremental price increases will affect a greater amount of 09 production. So hence my switch today.
I am beginning a modest stake in Alpha Natural Resources (ANR) today - I am not building a huge initial stake since we are overdue for a "commodities are dead" moment when these stocks drop 15-25%, CNBC shouting heads tell us the commodities bull is dead, people panic, blog readers start sending me comments about what a fool I am to buy commodity stocks, and the world is ending. When that happens I'll be accumulating shares, and then selling them to people who love to buy stuff 30% higher when CNBC says "commodities are not dead after all!" And so we'll keep repeating, at higher and higher plateaus over the years, while hedge funds roll in and out of these stocks, 1 week declaring commodities are a bubble and the next week the next best thing since sliced bread.
p.s. all that fuss yesterday about Arch Coal (ACI)? What a joke. Just like when Monsanto (MON) repeated the same guidance they gave a week earlier and the stock was sold off, upon further review all Arch Coal did was repeat previous guidance - and since CNBC reported it as a miss, it took the stock down. That's why I put the word "miss", in quotation marks. As I stated yesterday I took that opportunity to buy [Arch Coal "Warns"] It is now up 8% for the day and 10%+ since I bought it yesterday afternoon, so I am going to take some off the table here from what I bought yesterday. Not bad for about 2 hours work.
I bought 350 shares of ANR today in the $48s to create a 1.5% stake. I'll be buying much more the next time the market puts a stake in the heart of commodities, and hedge funds panic sell.
To offset this, I am selling my Peabody Energy (BTU) 1.2% stake in the $59.30s. I've held Peabody Energy since Sept 13, 2007 and have cleared about $6K in profits. Again, let me reiterate I like Peabody Energy a lot. I just am trying to keep the fund concentrated in terms of # of positions.
Long Massey Energy, Alpha Natural Resources, Arch Coal in fund; long latter 2 in personal account
9 comments:
I found your ANR analysis interesting. I suggest you should consider FDG( a Canadian trust listed on the TSX & NYSE which owns 60% of the Elk Valley mine.TCK, its largest shareholder owns the rest and operates the mine). I think it is the 2nd largest exporter of met coal.It has long life reserves and its share of production is around $13M tons per year. In addition it distributes almost all of its profits to its unit holders(qualified dividends). The latest quarterly distribution is $.50 but that was based on last year's coal prices of around $90. It enters into annual contracts which go into effect for orders placed after 4/1 so the new prices will only partially affect the current quarter's results. Starting in Q3 the distributions will sky rocket(multiple 13M times the increase in the new price(not yet announced but presumably somewhere between $50 and $100 more than last year's) and then divide by 150M(shares outstanding) and the new annualize distribution rate increase to somewhere between $6-$10. If you look at the chart's its performance has been very similar to ANR but in addition you
Hi serious,
I am familiar with FDG too. I've owned all these on and off over past 4-5 years. Much like natural gas some I have not looked at for maybe 2 years (like FDG or ANR up to about 3 weeks ago), but this resurgence had me take another deeper look at some sectors. I am pretty full up with coal at this moment; 4 of 50 names is approaching 10% of names in the portfolio. They generally trade together, at least directionally, so I think having 4 names pretty much gets me what I need. Thanks.
Hi TraderMark,
This is my first comment on your blog, and what a pleasure it is. You do an excellent job on picking stocks and explaining market psychology, must be all that cool-aid ;).
Anyways, I am 20 years old and just finished my junior year of college. I am also passionate about investing and cannot wait to start my career. After observing the market for a couple years, I have finally decided to tip my toes in.
I have seen the run-up of ANR in the last couple of months and believe that there is room for a double still. The one thing that really bugs me is that the 09 EPS estimates are increasing, however $6.89 (yahoo.com) still seams quite low. My estimates are more close to around $15 EPS for 09. Am I way to optimistic?
Thanks for your efforts.
Yours sincerely,
Vahagn
I won't ask what your screen name means ;)
I try to budget for the worst and hope for the best
my "worst" falls in between the current estimate and your number, but I am looking out to 2010 especially, where your number seems viable/beatable perhaps.
Mark can you show how you get your numbers for ANR EPS?
According to what you said you would think they will do $10-$15 EPS for 2009.
I just am wondering because I am on a completely separate page. I am trying to be conservative and still get at least $20 EPS for 2009. Also remember they do have some (like 5 mil tons) unprice steam coal for 2009 still. I think.
Thank you.
I am just wondering because if you only think they will do a little more than 15 EPS in 2010. Then ANr wouldn't go much higher than 120..a 8 PE, I mean look at FDG it only gets a 6 PE. And 2010 would be closer to the peak EPS year for ANR.
I was thinking more like $20 EPS for 2009. and $25-$30 EPS for 2010. And give those a 7-8 PE and a $200 longer term target.
I don't remember the calculation since I did it quite a few months ago.
FDG is a trust and hence gets a lower PE ratio
my EPS calculation is higher than yours but my PE ratio is higher - comparable to MEE, BTU, ACI, and peers. Not FDG which is not a peer.
As an aside FDG's forward PE a few sessions ago was 11.5. And thats the trust.
Bill when I wrote this piece the analysts who follow 6-8 companies full time as their job has a 09 estimate of 3.00s
My point was people were missing the forest for the trees - including the ones who are supposed to follow these companies 24/7 as their full time job. I'm a part time stock guy who follows 10 sectors and I was able to find a discrepancy.
The analysts now are at consensus of 9.29
Thats the whole point of the post. You can squabble on the exact numbers - I don't know what the exact number will be - I was giving a range and I believe my range will be hit. When I wrote the piece the analysts (who again are supposed to be experts on their specific universe) were nowhere near my estimates. Where the numbers end up exactly I don't know. I believe higher. Still.
Ironically enough the estimates were just upped another 4% to $9.60 something. I usually use a spreadsheet on like Excel when doing the numbers because that way when the market prices change for say met coal or something, you can just make the Small change and observe EPS changes.
(The spreadsheet works well for non secret box (non financial) stocks especially commodity ones like ANR, POE/MOS, or even Meena Polar. TSL and other solars work well, you just plug in ASP/cost/watt/poly/tax/interest expense, etc.)
I was wondering what your estimates were because they were from April, and since then met coal and steam coal prices have surged. Based on current prices with a little conservative bias I still get closer to $20 EPS and I am wondering what the heck I am doing wrong (or if I am right)
I think your article gave me the impression 09 EPS would be more towards $20 anyway.
"When you read these numbers, again keep in mind they are selling met coal at $85 this quarter... we are talking $200s (potentially breaching $300) into 2009.Outlook"
If they profit now from $85/ton coal that means their costs at most will be $85/ton for 09.
Then current met coal prices are closer to $300, but even if the only got $260/ton They bank $175/tonne in gross profit X 10 mil tons is 1.75 billion, after tax and interest, etc. I get at least $1bil net income, which is like $15 EPS but that is for met coal only (and being really conservative with price realization and costs). not even steam coal, which they have 5 mil unhedged for 09 I believe. And prices are on the rise. I'm not trying to pump, I am just wondering if there is a correct assumption that your estimates made in April which were much better than the analysts' at the time, can possibly need revision upward.
I remember your post in march on POT/MOS saying how POT would do more like $12EPS in 09 and $14 in 2010..while the analysts were at $7- 8EPS for 2009 ;)
You were good with the estimates, or at least better than analysts, but you were still off by A LOT, as POT should double $12EPS for 2009.
Since there's so much upside I guess that is why you used a higher 20 PE on stocks like POT and ANR, on your (low) EPS numbers, because they had plenty of upside. I thought that is how it usually works, when you use analysts estimates if they have big upside you give a large PE and if they have gone up so much, the PE contracts. ANR's estimates were rising just to catch up with current coal prices in april-june, I believe, so even if coal stopped increasing the estimates still need to be raised, now that coal is still increasing (except last week), the estimates are WAY too low I would think
Bill, when I wrote the piece we did not know how long the spot pricing would remain in place but it looked like it would last for a while. Since then, it has pretty much just improved.
I also don't assume that customers will pay spot prices but get some discount on volume
As for PE ratio it is arbitrary and impossible to know. Why are some stocks growing at 40% getting 75-100x PE ratios and why are some stocks growing 80% getting 5-15 PE ratio
I try to be conservative on estimates and hope the company does even better so there is even more upside.
P/E ratio is a complete guess as companies move from cyclical to secular growth. The P/E ratio in the drilling space for example has surprised me on how low it is and remains.
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