SunCoke Energy (SXC, Financial) cheered the street with its third-quarter results reporting significant growth in earnings that topped the analyst’s expectations. This was mainly driven by the progress it made at its Indiana Harbor coke making facility. The company managed to lower its corporate cost and received favorable inputs from its new Coal Logistics segment. In spite of the positives, we cannot neglect the head winds it is facing on account of a challenging coal price environment. Starting with its numbers lets see in detail what can we expect from SunCoke in the days ahead.
Results and beyond
Its revenue for the quarter declined 1.6% to $367.6 million from a year ago of $373.4 million. Adjusted for discontinued operations, the company reported earnings of 21 cents a share compared to 14 cents a share last year and also topped the 9 cents consensus estimate. Its operating income also increased 44% to $45.8 million from $31.8 million last year. The lowered revenue was mainly on account of the falling coke sales volume coupled with reduced coal prices.
This is a matter of serious concern for the company, and it is taking various measures to tackle this situation. In this direction the company announced its plans to scale back its coal mining business. Although this is a tough stand, SunCoke Chairman and CEO Fritz Henderson cites that the challenging coal price environment has led the management to make these hard decisions. This will allow SunCoke to focus on its core competencies of processing and handling raw materials for industrial customers.
The company has planned to carry out this operation step by step, and, in the initial phase, it will reduce its coal production from around 1.1 million tons to about 0.5 million tons. It is also exploring alternatives such as outsourcing its mining operations, purchasing all the coal requirements to supply its jewel coke facility. To further curb its costs, SunCoke intends to reduce 50% of the operations at its coal preparation plants. This will incur a one-time cost of $25 million to $35 million along with expenses of around $10 million related to contract terminations. These initiatives will help to improve its balance sheet in the coming months.
In addition, its projects are running smoothly and the company has completed the oven repair program at Indiana Harbor. This facility is well on track to become a full dues paying member of the coke plant fraternity within SunCoke Energy. Onto its gas sharing project, the management cites that Haverhill 2 is ahead of schedule, and it will benefit the company in the days to come.
Conclusion
Going forward, the company will continue with its initiatives that will add value to its business. Currently it does not have any trailing P/E, but its forward P/E looks impressive at 30.62 reflecting significant improvement in its earnings. The stock has declined considerably and touched its 52-week low few months back. This has opened sufficient room on the upside; however the company is still under pressure on account of the challenging coal price environment. In the light of these factors, investors must watch this stock from the sidelines to look for a better entry point.
