Japan's nuclear disaster probably set back the
world's push toward nuclear-powered electric generation by years. Instead
of huge nuclear energy expansion, which had been planned, we're likely
going to see more nations stick with tried-and-true coal-fired electric
plants, along with further expansion into natural gas.
Today we'll look at one of the largest U.S. coal
producers, a company whose stock offers investors a tremendous value
play. Despite its size, you've probably never heard of this
company.
The U.S. is not alone in its sudden change of
direction on energy. Germany's taking a hard look at its nuclear plants.
Both of these developed nations will need alternative (to nuclear, that
is) power generation methods. Outside of Japan, other countries in Asia,
as well as India, want more of our coal as their economies
expand.
To meet this demand from Pacific Rim nations, our
nation's third-largest coal producer is ready to step up production -
without putting a dent in supplying domestic needs. That company is
Cloud Peak Energy CLD.
America is essentially the Saudi Arabia of coal
production, and we're sitting on reserves that will last centuries. As
this Department of Energy graph shows, nearly half of our electricity
came from coal-powered plants last year.
Coal power is what Cloud Peak Energy provides. The
company is the only pure coal play in the Powder River Basin, and it's
one of the largest producers in the region. It produces coal from just
three mines in Wyoming and Montana.
Cloud Peak's share price rose 60 percent in 2010,
but after reporting higher-than-expected fourth-quarter expenses, and
issuing a conservative outlook for 2011 because of production costs, the
stock is down nearly 9 percent year to date.
For anyone interested in a top-quality U.S. coal
stock, this sell-off in shares presents a buying
opportunity.
Since its spin off from mining giant Rio
Tinto plc RIO in late 2009, Wyoming-based Cloud Peak
Energy has been profitable. This company, with a market cap of $1.3
billion, just reported full-year earnings per diluted share of $0.98,
compared with $6.49 in 2009. The 2010 profit was cut by charges, while
2009 was inflated by one-time adjustments.
This variability is unlikely to continue as Cloud
Peak becomes a more established independent company.
Revenue was down about 2 percent in 2010, to $1.37
billion, when the company reported production of 93.8 million tons of
coal. This is expected to increase slightly in 2011 - but that amount is
largely sold already.
Cloud Peak, which
has a current capacity of 100 million tons per year, has contracts to
sell 70 million tons in 2012.
The company controls 970 million tons of proven
and probable Powder River reserves.
Theoretically it could run out in 10 years, but
the company is likely to expand its holdings in this most prolific
coal-producing region to meet rising demand. That means investors should
look for expanding production capacity as a catalyst for the stock's
price.
A key metric in coal mining is gross margins per ton and for 2010 Cloud Peak Energy reported a much improved gross margin of $3.75, compared with $2.96 the year before, and $1.89 in 2009.
The stock is undervalued based on some measures.
It is trading below its 50-day moving average of $21.76, and carries a
forward P/E of just 8.8. It has a return on equity of 24
percent.
Also, the 12-month price target of $26.30 from
Thomson Reuters analysts suggest greater than 20 percent upside potential
from current levels.
Unlike the coal coming out of the Appalachian
region and many mines east of the Mississippi River, Powder River Basin
coal has desirable low sulfur content. This is important in an age of
global warming. The coal is also more accessible through surface mining
of deep beds, and production costs in the region are low - hence the
attractive gross margins.
Before the Japan crisis, Pacific Rim demand for
thermal, or steam, coal used for power generation was expected to
increase dramatically over the next decade. That's exactly the kind
produced by Cloud Peak Energy. After the earthquake, I expect demand will
be even stronger.
While shipping costs are high the nuclear recoil
puts coal (and natural gas) back in the picture. Cloud Peak's mines are
on key rail lines to reach West Coast export terminals. Spring Creek, the
company's Montana mine that's closest to the coast, draws a premium price
from export markets. Most notable is demand from South Korea for high-BTU
coal.
With the global energy picture muddled by the Japan disaster, the old standby sources of coal and natural gas are likely to remain key energy sources for years to come. Cloud Peak Energy is one of coal's leaders, and should be on your radar screen.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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