First the U.S. flirted with defaulting on its debts this summer on inaction from its Congress. Then the European debt crisis fears hit the market. As the world worked its way through this, a plethora of weak economic news came out the EU and the US. China added to this with sub 50 HSBC PMI numbers in recent months. However, in the last two weeks the US economic data has looked significantly stronger.
The NonFarm Payrolls number beat by roughly 50,000 in its headline number of 102,000 added jobs. Then it added more than 100,000 more jobs with the July and August upward revisions. This was approximately 150,000 more total jobs than expected. The Initial Claims number Thursday Oct. 6, 2011, was a minor beat at 400,000 versus an expected 402,000. The ADP jobs number beat at 91,000 versus an expected 45,000 on Wednesday. The ISM Index beat at 51.6 versus the expected 50.5, and the Construction Spending beat at +1.4% versus an expected -0.5% on Monday Oct. 3, 2011. The Russian GDP came in at the expected 3.40% (Year over Year). The US automakers beat at 13.10M versus 12.50M. The previous week the US Initial Claims number beat at 391K versus an expected 419K. The US Q2 GDP beat at 1.3% versus an expected 1.2% and a previous 1.0%. The Chicago PMI beat at 60.4 versus an expected 54.0. The Michigan Sentiment beat at 59.4 versus an expected 57.5. This all seems to mean that the U.S. economy is healthier than the EU credit crisis bears have been saying. It means that China is not in as bad shape as those same bears have been saying. If the U.S. is healthier, China’s biggest market is healthier. Then China is going to be healthier. Now the EU is on the verge of approving the EFSF expansion. It will apparently approve it without Slovakia if need be because Slovakia’s contribution will be so little. The Troika have already approved the next tranche of the first Greek bailout. Kicking Greece down the road should help a rally. If the EU can then show it is making significant pr! ogress t oward recapitalizing its banks, the whole world economic system will start to look appreciably healthier near term.
Coal equities have been falling dramatically with the overall market since July. This has been largely due to the generally worsening economic outlook. They have rallied slightly in this latest 1000 point DJIA rally, but they will rally a lot more on good economic news from Europe. Europe is a big coal user itself, but more than that it is a big customer of China. If both the US and the EU are suddenly looking healthier near term, depressed coal stocks are set to rally. The actual coal prices have not fallen much over the last few months even with the previously mentioned poor economic expectations. The chart of the mundi index Australian thermal coal monthly price below shows actual coal prices have not deteriorated much.
(Click charts to expand)
On good economic news from the EU, coal prices are likely to rise. Coal equities, which have become much more depressed than actual coal prices, are likely to rise dramatically. Taking the China steel industry as a barometer, iron ore demand remained strong throughout the summer with only a slight dip in July. The likely 2011 Chinese annualized output of slightly more than 700 million tonnes (of steel) is forecast to reach 850 million tonnes in 2012. This indicates coking coal and iron ore exporters to China should do a thriving business. Thermal coal use for generating electricity should grow significantly in a Chinese economy growing at 9%+. China’s GDP is forecast to be 9.4% for all of 2011 and 9.2% in 2012. On top of all of this the forecast for above average rain probability in northern Australiathis year is 65%-70%. La Nina may return in Q4. The expectation of dramatic storms in northern Australia in Q4 2011 are likely to push coal prices upward. The reality of such storms could send prices significantly higher.
The following companies are likely beneficiaries of the continued high demand for coal: ! Cliffs N atural Resources (CLF), Walter Energy Inc. (WLT), Teck Resources Ltd. (TCK), Peabody Energy Corp. (BTU), Rio Tinto Plc (RIO), and BHP Billiton LTD. (BHP). The fundamental financial data for these companies is in the table below. The data are from TDameritrade and Yahoo Finance.
| Stock | CLF | WLT | TCK | BTU | RIO | BHP |
| Price | $61.02 | $66.19 | $34.26 | $! 37.60 | $51.00% | $74.04 |
| 1 yr Analysts’ Target price | $116.36 | $105.09 | $63.86 | $68.30 | $94.44 | $87.01 |
| Predicted % Gain | 91% | 59% | 86% | 82% | 85% | 18% |
| PE | 5.53 | 8.90 | 10.99 | 11.45 | 6.25 | 8.67 |
| FPE | 4.08 | 6.71 | 6.53 | < font size="2"> 6.69 | 5.37 | 9.46 |
| Avg. Analysts’ Opinion | 1.8 | 2.3 | 1.7 | 1.8 | 1.6 | 2.6 |
| Miss Or Beat Amount For Last Quarter | -$0.79 | -$1.63 | +$0.06 | ! N/A | N/A | |
| EPS Estimate for FY2012 90 days ago | $14.97 | $9.87 | $5.25 | $5.62 | N/A | N/A |
| EPS Estimate for FY2012 90 days ago | $14.90 | $16.21 | $5.80 | $5.79 | N/A | N/A |
| EPS % Growth Estimate for 2011 | 78.90% | 7.50% | 85.50% | 29.50% | 25.00% | 40.10% |
| EPS % Growth Estimate for 2012 | 11.70% | 23.10% | 8.00% | 42.30% | 7.10% | 25.30% |
| 5 yr. EPS Growth Estimate per annum | 19.00% | 21.36% | 3.10% | 33.05% | 9.00% | 16.80% |
| Market Cap | $8.91B | $4.13B ! | $20.24B | $10.18B | $98.29B | $197.04B |
| Enterprise Value | $12.91B | $6.40B | $23.60B | $11.44B | $108.63B | $202.87B |
| Beta | 2.45 | 2.05 | 3.96 | 1.42 | 1.63 | 1.48 |
| Total Cash per share (mrq) | $1.63 | $3.27 | $2.17 | $4.62 | $4.07 | $3.81 |
| Price/Book | 1.61 | 2.04 | 1.25 | 1.95 | 1.58 | 3.47 |
| Price/Cash Flow | 4.85 | 7.00 | 7.13 | 7.43 | 5.06 | 6.32 |
| Short Interest as a % of Float | 3.49% | ! 3.37% | 0.80% | 4.86% | 0.43% | 0.68% |
| Total Debt/Total Capital (mrq) | 37.79% | 54.94% | 22.03% | 32.38% | 20.78% | 21.60% |
| Quick Ratio (mrq) | 0! .78 | 1.39 | 1.70 | 1.84 | 1.22 | 0.97 |
| Interest Coverage (mrq) | 21.88 | 4.82 | 13.74 | 9.53 | -- | -- |
| Return on Equity (ttm) | < span> 35.41% | 35.11% | 11.85% | 19.48% | 29.52% | 44.92% |
| EPS Growth (mrq) | 52.30% | -20.57% | 166.50% | 37.23% | 28.69% | 102.41% |
| EPS Growth (ttm) | 194.03% | 88.26% | -13.27% | 58.26% | 73.55% | 87.61% |
| Revenue Growth (mrq) | 52.48% | 88.25% | 27.21% | 20.86% | 18.38% | 33.13% |
| Revenue Growth (ttm) ! < /span> | 69.44% | 65.43% | 25.03% | 16.22% | 25.59% | 35.87% |
| Annual Dividend Rate | $1.12 (1.84%) | $0.50 (0.76%) | $0.6147 (1.79%) | $0.34 (0.90%) | $1.17 (2.29%) | $2.02 (2.73%) |
| Gross Profit Margin (ttm) | 39.73% | 47.13% | 45.37% | 23.15% | -- | 43.61% |
| Operating Profit Margin (ttm) | 33.73% | 30.58% | 32.00% | 20.33% | 37.94% | 44.35% | !
| Net Profit Margin (ttm) | 26.58% | 20.51% | 19.32% | 12.45% | 28.36% | 33.38% |
Four of the above companies (CLF, TCK, BTU, and RIO) have analysts predicted one year stock price gains of greater than 80%. All of these have FPEs less than 7.0. They are all strong companies. Plus a couple (RIO and TCK) also mine gold, silver, diamonds (expected to be strong for the next 1-2 years at least), and other needed metals. This should make them more stable, and perhaps even faster growers. All of these companies have high Betas. TCK has a Beta of 3.96. It and CLF (Beta = 2.45) should move up more quickly if the overall market keeps rallying on good EU credit crisis economic news. BHP is not predicted to grow quickly in the near term, but it has a 5-year EPS Growth Estimate per annum of 16.80%. For a long term investor, BHP, a perennial industry leader, may be a great longer term buy. Still I will concentrate on the four more convincing nearer term fundamental stories. BTU is the! purest coal play.
The 2-year chart of CLF is below.
The 2-year chart of TCK is below.
The 2-year chart of BTU is below.
The 2-year chart of RIO is below.
These all seem to be rebounding from oversold levels. They have more room to go to the upside. They are below their 200-day SMAs. These strong stocks should push well above their 200-day SMAs on any better world growth news. The four stocks are forecast to have better than 80% predicted one year percentage price gains. The FPE multiples of these are fantastic.
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