2 Undervalued Coal Miners to Consider

Coal mining stocks are making a comeback amid the global energy shortage

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Jun 27, 2022
Summary
  • Energy shortages have opened a gap for coal miners.
  • The price of coal has more than doubled in the past year.
  • Coal mining is a captive market. Thus, the existing big players will be the ones to profit.
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Coal prices have surged amid a global energy shortage that has developed over the past two years. For many, coal is a thing of the past as renewable energy has entered the fray, and coal is by far the most polluting fossil fuel. However, it needs to be considered that we're still a long way from a having a renewable energy infrastructure that would support the globe's energy demands, especially now that sanctions on Russia are adding a chokehold on oil and gas supplies in the Western world. Thus, these seemingly outdated fossil fuels still have a legitimate role to play as part of the energy ecosystem.

Coal has been utilized as a stop-gap over the past few years. For instance, with global energy shortages, coal production has surged in many emerging markets. We've also seen cases in which nations have reverted to coal usage to tap into their reserve energy plants; Germany provides a good example. As a result, coal prices have more than doubled compared to a year ago, creating a profitable environment for most coal miners.

With that being said, here are two of my favorite coal mining stocks to consider as coal enjoys a cyclical upswing.

Alpha Metallurgical Resources Inc.

Alpha Metallurgical Resources Inc. (

AMR, Financial) produces thermal coal within the United States through its 19 active mines and eight load-out and preparation facilities. The company's vertically integrated business model means that it holds significant bargaining and pricing power, conveyed by its gross profit margin of 35.89% and its return on invested capital ratio of approximately 1.06.

Furthermore, Alpha Metallurgical stock's relative valuation metrics imply that the stock iss trading at a deep discount. For example, Alpha Metallurgical is trading at a price-sales ratio of 0.87 and a price-earnings ratio of 3.57 times.

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Lastly, the stock is set to benefit from earnings momentum after the company beat its first-quarter earnings target by $1.48 per share. Alpha will likely sustain its growth for the foreseeable future as it has one of the most diverse metallurgical portfolios in the industry.

Arch Resources Inc.

Arch Resources Inc. (

ARCH, Financial) is another coal miner that's benefited from global energy supply shortages. The company produces thermal and metallurgical coal from its seven actively owned and operated mines.

Furthermore, this mining house clearly provides its shareholders with maximum return on their investment with a return on equity (ROE) ratio of 1.17. The company's solid ROE ratio largely stems from Arch's record earnings feat in its first quarter.

The company produced stunning results in its first quarter with $321 million in Ebitda, beating the Bloomberg consensus estimate of $308 million. In addition, the company generated a massive $269 million in free cash flow, which was 13% of its market capitalization at the time of its earnings release.

Arch expects a positive outcome for its second quarter as the management opined the following: "We anticipate a significant increase in our financial results in the second quarter given the highly favorable pricing environment along with the anticipated step-up in coking coal volumes, and we also expect continuing strength in the year's second half as shipment levels normalize."

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The stock looks undervalued with a price-earnings ratio of 4.68, which is nearly 57% lower than the sector median.

Concluding thoughts

Coal stocks could be a lucrative tactical plays amid an energy shortage. Coal mining is a capitive market, meaning that supply shortages could be prolonged, and existing market leaders such as Alpha Metallurgical and Arch Resources could take advantage, though investors should note that commodity investing relies on market timing and thus can be risky.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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