Coal Companies Face Long-Term Challenges, But Business Great for Now

5/18 - "Coal’s edge...is that it’s still the low bidder when it comes to costs, despite the recent run-up in prices. Also, everything needed to radiate coal-fired power all over the map already is in place, not only the generating stations but storage, transit and integration with the grid. On both accounts, solar and wind have plenty of work to do."

"Utilities know there will be some kind of legislation and a carbon-capture mandate, but there are no requirements yet or price tag associated with carbon," said Ann Kohler, an energy analyst with Caris & Co. "Regulators are looking at natural gas, renewables, nuclear. There are a lot of unknowns. Utilities that have started construction are moving forward, but otherwise, plans are on hold" for new coal-burning plants...Yet solar, wind and other renewables aren’t nearly ready to dethrone Old King Coal, particularly overseas. In fact, if green alternatives do eventually curtail coal’s dominion in the U.S., it’s not hard to imagine the industry thriving on the tobacco model: ostracized at home, welcomed around the world.

As for the stocks, Kohler rates Massey Energy Co. (MEE) a buy for its concentration in metallurgical coal, the sweet spot of the market. She expects earnings per share to expand from $1.17 last year to $3.05 this year and $4.13 next year. Alpha Natural Resources Inc. (ANR) and Walter Industries Inc. (WLT) also are well-positioned in metallurgical coal...Peabody’s shares, meanwhile, now may be too rich to risk money on, Kohler said, based on past valuation ratios.

The whole group, however, won’t for long be enjoying these lofty prices for their output, Kohler believes, and that may inject volatility into their financial results. Mining is recovering in Asia, and prices per ton are likely to settle back to elevated but not aberrant levels. Any shortages in China tied to this week’s destructive earthquake are expected to be short-lived. Furthermore, Kohler foresees a rebound in the dollar."