Zacks Industry Outlook Highlights: Alliance Resource Partners, Natural Resources LP, Alliance Holdings, CONSOL Energy and Alpha Natural Resources

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Jul 23, 2014, 09:30 ET

CHICAGO, July 23, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Coal, including Alliance Resource Partners, L.P. (Nasdaq:ARLP-Free Report), Natural Resources LP (NYSE:NRP-Free Report), Alliance Holdings GP, L.P. (Nasdaq:AHGP-Free Report), CONSOL Energy Inc. (NYSE:CNX-Free Report) and Alpha Natural Resources, Inc. (NYSE:ANR-Free Report).

Industry: Coal

Link: http://www.zacks.com/commentary/33549/coal-industry-languishes-but-all-is-not-lost

Coal plays a vital role in the economic development of a country. It is commonly used as a source of cheap electricity production. Coal also creates employment opportunities for thousands of people. Coal with its heat generating capability also plays an essential role in the chemical, fertilizer and steel industries.

This fossil fuel is still a dominant source of power generation worldwide despite the increasing use of other resources. Natural gas and renewables are eating away its share at a rapid pace, challenging the monopoly of coal.

There is no denying the manifold advantages of coal and its various byproducts that find use in the industrial sector. However, unchecked usage of this fossil fuel has raised concerns in all quarters. The primary cause of concern related to coal is global warming caused by the emission of greenhouse gases.

Recently, the U.S. Environmental Protection Agency (EPA) has proposed a Clean Power Plan, the primary objective of which is to cut down emissions from existing power plants by 30% over the 2005 to 2030 time frame.

Given the mounting environmental pressure, there is definitely a popular move away from coal as a power source. Per a report from Industrial Info Resources, active coal mining projects in the U.S. have declined by 39% from 2011 levels. The report says that such projects declined to $7.5 billion in 2013 from $12.3 billion in 2011.

Facts clearly indicate that the importance of coal is gradually waning in the U.S. Will investments in coal stocks fail to generate adequate returns? Coal has lost ground for sure, but it is still a long way to go before it actually runs out of steam.

Response from the Coal Companies

Recent developments reveal that the coal companies are not ready to accept the EPA carbon plan without a fight. A lawsuit filed by Murray Energy Corporation has now been joined by nine states. Murray Energy claims that the EPA regulation will have a negative impact on thousands of jobs and hurt the American economy.

Zacks Rank

The Zacks Industry Rank, which relies on the same estimate revisions methodology that drives the Zacks Rank for stocks, currently puts the coal industry at 236 out of 260 industries in our expanded industry classification. This puts the industry in the lower third of all industries, corresponding to a negative outlook.

The way to look at the complete list of 260 industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third of the list (Zacks Industry Rank of #86 to #169) is neutral while the outlook for the bottom one-third (Zacks Industry Rank #170 and higher) is negative.

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).

Of the 20 companies belonging to the coal industry in our coverage 1 each has a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), while 9 have a Zacks Rank #4 (Sell) and 2 have a Zacks Rank #5 (Strong Sell). The remaining 7 have a Zacks Rank #3 (Hold).

Overall, the coal industry has been through troubled times in 2013, with hardly any respite seen in the first half of 2014.

Earnings Review and Outlook

The coal industry's overall earnings results in the first quarter were on the softer side. Yet, U.S. coal producers like Alliance Resource Partners, L.P. (Nasdaq:ARLP-Free Report), Natural Resources LP (NYSE:NRP-Free Report), Alliance Holdings GP, L.P. (Nasdaq:AHGP-Free Report), CONSOL Energy Inc. (NYSE:CNX-Free Report) and Alpha Natural Resources, Inc. (NYSE:ANR-Free Report) among others surpassed the Zacks Consensus Estimate.

In total, 36% of the coal companies in our coverage either met or came out with positive earnings surprises in the first quarter, way below the 67.8% average for the S&P 500.

The second quarter earnings releases are expected to remain soft as well. As per our current projection, nearly 50% of the coal companies under our coverage are expected to report in the red.

In response to the lackluster coal market fundamentals, the companies have resorted to stringent measures to improve their financial performance. Miners have taken initiatives to cut cost while engaging in tactful capital expenditures to assure the safety of mining operations. The high-cost coal mines are being shuttered while operations are moved to low-cost regions. Longwall coal mining techniques are also having a positive impact on production.

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