Despite growing concerns about the environment and increasing ecological renewable energy alternatives, demand for coal will likely remain resilient due to rapid economic growth, particularly in emerging markets. Electricity use for manufacturing, building infrastructure, and urbanization increases with the expansion of economies, boosting coal usage.
Given the industry’s tailwinds, it could be wise to invest in fundamentally sound coal stocks Yankuang Energy Group Company Limited (YZCAY) and CONSOL Energy Inc. (CEIX) for solid returns. However, it seems prudent to wait for a better entry point in Warrior Met Coal, Inc. (HCC) now.
Despite the rise of renewable energy alternatives like solar, wind, and hydroelectric power, coal continues to dominate as a reliable and affordable energy source worldwide. This constant demand is being driven by electricity generation and industrial activity requirements that require coal.
The International Energy Agency (IEA) reported that world demand for coal hit an all-time high in 2023. According to its Coal 2023 report, the IEA projected that coal demand grew to 8.54 billion tons, an increase of 1.4% compared to 2022, primarily fueled by an 8% surge in usage in India and 5% in China due to increased demand for electricity and low hydropower output.
Despite declining over the next few years, the IEA expects consumption of coal to still be above 8 billion tons through 2026.
As per the U.S. Energy Information Administration, in 2024, the total coal consumption is projected at 391.3 million st, up 1.6% from the previous month’s projection. For the electric power sector, coal consumption is anticipated at 351.9 million st this year.
The energy transition initiative is currently on the slowdown, giving plenty of opportunities for the coal market to flourish. There is still a gap between replacing the traditional fossil fuels with renewable resources. Economies have shifted their focus to the effects of climate change, leading to a slowdown in energy replacement.
According to the Transparency Market Research report, the coal market is expected to result in a market volume of $2.10 trillion by 2031, exhibiting growth at a CAGR of 4.4% during the forecast period.
With these encouraging trends in mind, let’s delve into the fundamentals of the three Coal stock picks, beginning with the third choice.
Stock #3: Warrior Met Coal, Inc. (HCC)
HCC produces and exports non-thermal metallurgical coal for the steel industry. The company operates two underground mines located in Alabama. Its metallurgical coal is sold to a customer base of blast furnace steel producers, primarily in Europe, South America, and Asia. It also sells natural gas extracted as a byproduct from coal production.
On October 24, 2023, HCC paid a regular quarterly cash dividend of $0.07 per share on November 10, 2023, to stockholders of record as of the close of business on November 3, 2023.
HCC pays an annual dividend of $0.28, which translates to a yield of 0.47% at the current share price. Its four-year average dividend yield is 4.36%. Moreover, the company’s dividend payouts have increased at a CAGR of 11.9% over the past three years.
In terms of forward non-GAAP P/E, HCC is trading at 5.99x, 62.8% lower than the industry average of 16.09x. Likewise, the stock’s forward EV/EBITDA multiple of 3.54 is 55.9% lower than the industry average of 8.02. However, its forward Price/Sales of 1.81x is 55.6% higher than the industry average of 1.20.
HCC’s trailing-12-month gross profit and EBIT margins of 43.42% and 32.39% are 52.8% and 180.2% higher than the respective industry averages of 28.42% and 11.56%. But the stock’s trailing-12-month levered FCF margin of 4.29% is 6.8% lower than the industry average of 4.60%.
During the third quarter that ended September 30, 2023, HCC’s total revenues increased 8.5% year-over-year to $423.49 million. But its operating income decreased 13.4% from the year-ago value to $107.75 million. Also, its adjusted net income came in at $96.59 million and $1.85 per share, down 11.1% and 11.9% year-over-year, respectively.
In addition, the company’s total assets stood at $2.22 billion as of September 30, 2023, compared to $2.03 billion as of December 31, 2022.
Street expects HCC’s revenue and EPS for the fourth quarter (ended December 2023) to increase 14.5% and 38.7% year-over-year to $394.64 million and $2.64, respectively.
Over the past six months, HCC’s stock has surged 46.3% and 59.4% over the past year to close the last trading session at $59.86.
HCC’s POWR Ratings reflect its mixed outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
HCC has a C grade for Growth and Value. It is ranked #10 out of 13 stocks in the A-rated Coal industry.
In addition to the POWR Ratings we’ve stated above, we also have HCC’s ratings for Sentiment, Momentum, Quality, and Stability. Get all HCC ratings here.
Stock #2: Yankuang Energy Group Company Limited (YZCAY)
Headquartered in Zoucheng, China, YZCAY engages in the mining, preparation, and sale of coal globally. The company provides thermal, PCI, and coking coal; manufactures, installs, repairs, and sells mining equipment and machinery; sells coal mining and excavating equipment, cable, and rubber products; and produces and sells chemicals.
In terms of forward EV/Sales, YZCAY is trading at 1.40x, 26.2% lower than the industry average of 1.90x. Likewise, the stock’s forward EV/EBIT multiple of 7.03 is 22.8% lower than the industry average of 9.11. Furthermore, its forward Price/Sales of 0.60x is 55.3% lower than the industry average of 1.33x.
YZCAY’s trailing-12-month levered FCF margin of 18.32% is 219% higher than the industry average of 5.75%. Also, the stock’s trailing-12-month ROCE and ROTC of 22.13% and 10.63% are higher than the industry averages of 19.42% and 8.97%, respectively.
YZCAY pays an annual dividend of $2.84, which translates to a yield of 14.03% on the current share prices. Its four-year average yield is 15.58%. The company’s dividend payouts have grown at a CAGR of 41.5% over the past five years. Yankuang Energy has raised its dividend for seven straight years.
For the nine months that ended September 30, 2023, YZCAY reported a total operating revenue of RMB 135.04 billion ($18.97 billion). The company’s operating profit came in at RMB 28.25 billion ($3.97 billion) for the period. Its total profit and EPS were RMB 20.87 billion ($2.93 billion) and RMB 2.08, respectively.
As of September 30, 2023, the company’s current assets and total assets amounted to RMB 90.88 billion ($12.76 billion) and RMB 337.86 billion ($47.45 billion), respectively.
Shares of YZCAY have gained 37.4% over the past six months to close the last trading session at $20.26.
YZCAY’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has an A grade for Momentum and a B for Value and Stability. Within the A-rated Coal industry, YZCAY is ranked #6 of 13 stocks.
Click here to access additional ratings of YZCAY for Growth, Quality, and Sentiment.
Stock #1: CONSOL Energy Inc. (CEIX)
CEIX produces and exports bituminous coal. The company operates through the Pennsylvania Mining Complex and CONSOL Marine Terminal segments. Its Pennsylvania Mining Complex segment provides mining, preparation, and marketing of bituminous coal. Its CONSOL Marine Terminal segment offers coal export terminal services.
In terms of forward non-GAAP P/E, CEIX is trading at 4.83x, 52.3% lower than the industry average of 10.12x. Further, the stock’s forward EV/Sales multiple of 1.19 is 37.3% lower than the industry average of 1.90. Likewise, its forward Price/Sales of 1.19x is 10.4% lower than the industry average of 1.33x.
CEIX’s trailing-12-month net income and EBIT margins of 25.53% and 31.53% are 99% and 47.1% higher than the respective industry averages of 12.83% and 21.43%. Also, the stock’s trailing-12-month ROTA of 26.01% is 257.5% higher than the industry average of 7.28%.
CEIX repurchased about 1.1 million shares of its common stock from the open market during the fourth quarter of 2023. Also, through a 10b5-1 plan in place for January, CEIX repurchased an additional 307 thousand shares of its common stock.
Thus, with solid free cash flow generated during the fourth quarter, the company repurchased nearly 1.4 million shares. As a result, it allocated approximately 85% of its quarterly free cash flow toward share repurchases.
For the fourth quarter that ended December 31, 2023, CEIX’s total revenue and other income increased 1.9% year-over-year to $649.44 million. Its earnings before income tax were $178.85 million for the same period. The company’s net income and EPS came in at $157.07 million and $5.05, respectively.
Furthermore, the company’s adjusted EBITDA for the CONSOL Marine Terminal segment increased 46% year-over-year to $21 million, while its total adjusted EBITDA was $239.93 million. Its free cash flow grew 42.2% from the year-ago value to $164.99 million.
As per the financial and operating performance guidance for the full fiscal year 2024, PAMC coal sales volume is expected to be between 25 - 27 million tons. PAMC average realized coal revenue per ton sold2 expectation of $62.50-$66.50. Also, the company projects Itmann Mining Complex coal sales volume of 600-800 thousand tons.
Analysts expect CEIX’s EPS for the third quarter (ending September 2024) to increase marginally year-over-year to $3.14. For the fiscal year ending December 2025, the company’s EPS is expected to grow 6.4% from the prior year to $13.40. Also, the company has topped the consensus revenue estimates in three of the four trailing quarters.
CEIX’s stock has surged 14.6% over the past six months and 33.8% over the past year to close the last trading session at $83.58.
CEIX’s POWR Ratings reflect its bright prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
CEIX has an A grade for Quality and Momentum. It also has a B grade for Value. It is ranked #5 among 13 stocks in the A-rated Coal industry.
To access CEIX’s POWR ratings (Stability, Sentiment, and Growth), click here.
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YZCAY shares were unchanged in premarket trading Thursday. Year-to-date, YZCAY has gained 6.07%, versus a 4.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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