Arch Coal Inc (ACI): Will Coal Companies Recover in 2013?

Natural gas and electricity

The price of natural gas rallied in 2013 from its very low rate in 2012. The sharp rise in natural gas is likely to steer leading utility companies to use more coal over natural gas once their natural gas stockpiles deplete. The demand for electricity is another factor that could affect the price of coal. The EIA currently estimates electricity consumption will rise in 2013 by 1.2% (y-o-y). The rise in consumption for electricity and the shift from natural gas to coal explains why the EIA projects the coal consumption in the U.S will grow in 2013 by 7.3% (y-o-y). If coal consumption will pick up in the coming months, this will reflect in these coal companies revenues.

Another alternative for investing in coal

For those who wish to invest in a company that is only partly exposed to coal may consider CSX Corporation (NYSE:CSX), which is a railroad company. One of the company’s operations is transporting coal. The company is considered the largest coal transporter east of the Mississippi. Unlike the above mentioned companies, CSX Corporation (NYSE:CSX) has done well both in the stock market and with its financial performance: since the beginning of the year the company’s stock rallied by more than 32% (YTD). The company’s revenue in the first quarter of 2013 remained nearly unchanged, but its operating profitability rose to 29.5%. The company also offers a reasonable dividend with a 2.3% annual yield.

The bottom line

I still think that coal companies will make a comeback in the coming months, assuming of course the demand for electricity will increase compared to 2012. The high price of natural gas compared to 2012 is likely to keep utility companies slowly shifting back to coal.

The article Will Coal Companies Recover in 2013? originally appeared on Fool.com and is written by Lior Cohen.

Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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