September 7, 2018 - The coal industry continues to stage a silent comeback from the difficult times. Coal stocks have returned 18.6% in the past 12 months, marginally outperforming the Zacks S&P 500 Composite’s growth of 18.3%. The coal industry is gradually coming out of the dark days due to rising international thermal coal demand, an increase in metallurgical coal prices and constructive steps taken by the new U.S. administration to safeguard the interests of the U.S. coal industry.
Despite its significant contribution toward rapid global urbanization, the coal industry was under scrutiny for quite some time. Coal is primarily held responsible for the flare up in carbon dioxide emission, as it is utilized in electricity generation and other industries for its heat content.
However, things have started to change for the better with the Trump administration delivering on its promise of taking pro-coal steps. President Trump’s decision to withdraw the United States from the Paris Climate Agreement was a solid step toward that direction.
New coal mines have opened in the United States to cater to rising demand in domestic and international markets. This is a positive development for the coal industry. This was not the scenario a few years back, when coal operators were drastically cutting expenses to survive difficult times.
Against this backdrop, we have undertaken a comparative analysis of two stocks in the Zacks Coal industry — Alliance Resource Partners, L.P. and Arch Coal, Inc. — to ascertain which one performed better and is a suitable investment option right now.
Earnings & Surprise Trend
Arch Coal’s second-quarter 2018 operating earnings surpassed the Zacks Consensus Estimate by 15.90%. The company surpassed the Zacks Consensus Estimate in three out of the trailing four quarters, with the average positive surprise being 29.39%.
Alliance Resource Partners’ second-quarter 2018 adjusted earnings beat the Zacks Consensus Estimate by 1.59%. The partnership surpassed the Zacks Consensus Estimate in two of the trailing four quarters, with an average negative surprise of 0.06%.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12-month period for Arch Coal and Alliance Resource Partners is 39.8% and 24.8%, respectively. Hence, Arch Coal wins this round hands down.
In the past 60 days, the Zacks Consensus Estimate for Alliance Resource Partners’ 2018 earnings has moved up 5.8% to $3.30, reflecting year-over-year growth of 14.9%.
The Zacks Consensus Estimate for Arch Coal’s 2018 earnings has been revised upward by 8.3% to $10.80, reflecting a year-over-year decline of 4.9%.
Zacks Rank & VGM Score
Alliance Resource Partners currently carries a Zacks Rank #1 (Strong Buy) and has a market capitalization of around $2.65 billion.
Arch Coal currently carries a Zacks Rank #3 (Hold). It has a market capitalization of $1.74 billion.
Both coal operator currently carry a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Alliance Resource Partners and Arch Coal’s debt/capital ratio stands at 25.43% and 32.25% compared with the industry’s average of 39.73% and Zacks S&P 500 composite’s 41.72%. The debt/capital ratio of both is lower than the industry level but Alliance Resource Partners wins this round.
Units of Alliance Resource Partners have gained 2.5% year to date against a decline of 4.9% in Arch Coal’s share value. Hence, the price movement of Alliance Resource Partners is better than that of Arch Coal.
Alliance Resource Partners and Arch Coal are comparable operators in the U.S. coal industry based on their current market capitalization.
While Arch Coal has an edge in some of the above-mentioned parameters, our verdict goes to Alliance Resource Partners, given its better rank and lower debt-to-capital level.