Which Major Coal Mining Company Is Trading at a Discount?



Relative valuation

A company’s relative valuation helps us compare its value relative to its peers’ values. Specifically, the EV-to-sales (enterprise value-to-sales) ratio represents the value created per dollar of sales made by a company during one year. A higher EV-to-sales ratio implies that the company in question is overvalued compared to its peers.

The continued downturn in coal (KOL) prices resulted in operating losses for major coal mining companies such as Arch Coal (ACIIQ) and Peabody Energy (BTUUQ). Notably, both Arch Coal and Peabody Energy filed for Chapter 11 bankruptcy protections.

The EV-to-sales ratio is useful in comparing the value created from the operations of one company to that of another. However, these multiples must be considered with caution because a higher EV-to-sales ratio can also imply a higher value addition for the company from higher sales in the future.

Article continues below advertisement

Among major coal mining companies (excluding the bankrupt companies), Alliance Resource Partners (ARLP) has the highest current EV-to-sales value of 1.23x. It’s followed by Westmoreland Coal’s (WLB) EV-to-sales value of ~0.89x. Cloud Peak Energy is a low leverage coal player. It has the lowest EV-to-sales value of ~0.73x.

Moving ahead, analysts expect a marginal decrease in Westmoreland Coal’s EV-to-sales values. They expect an increase in other coal players’ EV-to-sales values.

Analysts’ price targets

As of August 31, 2016, analysts had a consensus 12-month target price of $2.67 for Cloud Peak Energy. The price targets for Westmoreland Coal and Alliance Resource Partners were $9.5 and $20.0, respectively. As of August 31, 2016, there weren’t any price targets or “buy” recommendations for Arch Coal and Peabody Energy stocks.

Return potential

Considering its closing price on August 31, 2016, Westmoreland Coal has the highest return potential of 24% among its peers. However, Cloud Peak Energy and Alliance Resource Partners were trading above their respective price targets as of August 31, 2016.

In the final part of this series, we’ll discuss major coal mining companies’ fiscal 2016 guidance. We’ll finish the series with an outlook for the coal mining industry.


More From Market Realist