A company’s valuation helps us compare a company with its peers. Specifically, the EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple represents the cost of a company’s common stock. A higher EV-to-EBITDA multiple implies that the company in question is overvalued as compared to its peers.
A company’s EV-to-EBITDA multiple isn’t impacted by its capital structure. As coal (KOL) mining is a capital-intensive industry, companies in this industry raise capital through a variety of sources to fund their expansion plans. As a result, the capital structure can vary significantly among them.
The EV-to-EBITDA multiple is useful for comparing the value of one company to that of another. In comparison, the forward EV-to-EBITDA multiple takes into account the company’s EBITDA for the next 12 months.
On December 14, 2016, Alliance Resource Partners (ARLP) had the lowest forward EV-to-EBITDA multiple value of 4.2x. It was followed by Westmoreland Coal’s (WLB) forward EV-to-EBITDA value of ~5.4x and Cloud Peak Energy’s 5.9x.
Analyst price targets
Considering its closing price on December 14, 2016, Arch Coal has the highest return potential of 24% among its peers. However, Westmoreland Coal closed above the analyst consensus price target on December 14.
In the final part of this series, we’ll discuss the fiscal 2016 guidance of major coal mining companies and conclude the series with an outlook of the coal mining industry.