CHICAGO, Nov. 14, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Coal (part 1), including SunCoke Energy ( NYSE:SXC-Free Report), Alliance Resource Partners, L.P. ( Nasdaq:ARLP-Free Report), Cloud Peak Energy Inc. ( NYSE:CLD-Free Report) and CONSOL Energy ( NYSE:CNX-Free Report).
Industry: Coal (part 1)
Coal has played a vital role in the industrialization of the western economy. The fossil fuel came to be widely used during the Industrial Revolution in England in the 18th century. This quickly spread to America in the 1800s as steam-powered railroads and steamships used coal to run their boilers. The use of coal as a source of cheap electricity production is in that sense relatively new, marking a new era of modernity.
The wide uptake of coal created employment opportunities for thousands. The fossil fuel with its heat-generating capability was also found to play an essential role in the chemical, fertilizer and steel industries.
Coal still remains a dominant source of power generation worldwide despite the increasing use of other resources. However, natural gas and renewables are eating away its share at a rapid pace.
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.
In spite of its many detractors, a U.S. Energy Information Administration (EIA) report indicates that U.S. coal production will increase by an average of 0.3% per year from 20.6 quadrillion Btu in 2012 to 22.6 quadrillion Btu in 2040. While U.S coal exports -- which totaled 3.2 quadrillion Btu in 2012 -- will remain flattish until 2020, it will finally increase to 3.8 quadrillion Btu in 2040.
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 149 out of 258 industries in our expanded industry classification. This puts the industry in the middle third of all industries, corresponding to a neutral outlook.
The way to look at the complete list of 258 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 22 coal companies in our coverage, SunCoke Energy ( NYSE:SXC-Free Report) sports a Zacks Rank #1 (Strong Buy), two have a Zacks Rank #2 (Buy), while three are relegated to a Zacks Rank #4 (Sell) and one to a Zacks Rank #5 (Strong Sell). The remaining 15 have a Zacks Rank #3 (Hold).
Earnings Review and Outlook
The coal industry's overall earnings results in the third quarter were mixed. Nearly 51% of the coal stocks in our coverage came out with a positive earnings surprise this quarter, which compares unfavorably with a 72.9% average beat clinched by S&P 500 stocks.
Besides companies like SunCoke Energy Inc., Alliance Resource Partners, L.P. ( Nasdaq:ARLP-Free Report) and Cloud Peak Energy Inc. ( NYSE:CLD-Free Report) that have come up with third-quarter earnings beats, CONSOL Energy ( NYSE:CNX-Free Report), among others, is also expected to better its performance sequentially in the fourth quarter.
The winter months will undoubtedly see a pick up in thermal coal demand though railroad congestion has yet to be sorted out, impacting producers and end users alike.
In response to 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 ensure safety at its mining operations. 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.
A bright spot for these coal operators is the rising demand for coal from India. Coal production in India falls far short of its domestic need as most of its power units run on coal. The country will thus have to rely on imports to forge ahead with its growth plans. India needs to import both thermal and metallurgical coal providing ample room for these U.S. exporters to vie for.
For a detailed look at the earnings outlook for the different sectors in our coverage, please check our weekly Earnings Trends report.
Coal has a long list of drawbacks. But its advantage lies in its price, which is far cheaper than other sources of fuel. Environmental concerns have relegated this fuel source lower on the priority list for policy makers in recent years, but there could be a favorable angle for coal in the recent mid-term election results. All in all, the availability of coal in most countries across the globe makes it a widely accepted source of power generation globally.
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