SunCoke Energy (SXC, Financial) is suffering due to a soft coal pricing environment. It is engaged in various ways to get back on track in this soft market and maintain profitability in the long run. Despite the turmoil, management is aiming for a turnaround. Management is further confident of a better operational and financial performance by the company in the future. It is now focusing on various aspects to improve its profitability. It will be interesting to see how SunCoke aligns itself in this soft coal pricing market to improve its performance.
SunCoke's strategies
Under the various strategies that SunCoke took to improve its performance, it has already started executing Contingency Plan to downsize coal mining business. It is laser focusing on selling a portion of its Coal Mining Business but its smooth flow is largely hit by the prevailing coal price environment. But SunCoke is still confident seeing high levels of productivity, safety and regulatory compliance in this weak pricing. SunCoke is thinking it to be a wise move to vacate a significant portion of the Coal Mining Business as it will help the company to focus majorly on the key competencies and core elements of processing and handling raw materials for industrial customers.
Under its Contingency Plan, SunCoke is initially focusing on reducing the coal production from 1.1 million annual tons to about 500 million thousand tons of coal. These initiatives will help SunCoke to reduce the costs and improve margins even in this soft coal pricing environment. This will also help SunCoke to explore new alternatives such potentially retaining contractors to mine on its behalf or purchasing all its coal requirement to supply its Jewel Coke facility. It is further reducing its operational activities at its coal preparation plant by 50% in order to further reduce the costs, improving the margins.
Moving ahead, SunCoke is also having expecting good results from M&A. It has already seen good synergies from M&A initiatives in the past and further it thinks that this will help the company to grow further. With the M&A SunCoke is thinking to generate qualifying income in their entirety.
The company’s downsizing plan is expected to reduce the ongoing cost to supply coal to its Jewel Coke operation. This will however incur costs and can hurt SunCoke’s margins. But the company also has other plans. If it fails to sell the coal mining business and the coal mining becomes less economical, the company may vacate the remaining mines. This move might help it to remain on track in this weakness.
Conclusion
Moving on to the fundamentals, the stock doesn’t have trailing P/E as it is facing weakness due to soft coal pricing environment but the forward P/E of 30.70 indicates handsome earnings growth in future due to various strategies that it has under taken. But in the long term the company’s earnings are disappointing. For the next five years, it earnings are growing at a CAGR of just 9.00% which is very less than the industry average of 20.40%. The stock may look profitable as of now, but I will not suggest the investors to pick this stock on the back of weak coal pricing. Lest I would like to suggest that the investors should wait for the right time when the coal market comes up.
