Pennies on the Dollar: Is Coal Ready for a Comeback?: Peabody Energy Corporation (BTU)

Page 1 of 2

Coal stocks are cheap, and rightly so. A global economic recession, cheap natural gas, and a hostile political environment have seemingly turned coal into a second-rate energy source. But cheap companies can be a value grab — or turn out to be completely worthless. Let’s take a look at four coal stocks — three trading for pennies on the dollar and one slightly more expensive — to see if we can find a diamond in the rough.

The most important question you’ll ever ask
Famed investor Benjamin Graham said, “It is an almost unbelievable fact that Wall Street never asks, ‘How much is the business selling for?’ Yet this should be the first question in considering a stock purchase.” Mr. Graham’s simple question has many answers, and investors have worked hard to develop different ways to place a price tag on a company’s worth. Ben’s favorite: tangible book value.

Peabody Energy Corporation (NYSE:BTU)Tangible Book Value = (Assets – Liabilities) – (Intangible Assets + Goodwill)

This simple metric takes all the estimated value out of a company and leaves us with something akin to a company’s price if it were to be liquidated tomorrow. Intangible assets like brand power or business relationships are gone, giving investors a realistic number for a company’s bird-in-hand worth.

Valuation station
“Pennies on the dollar” isn’t cliche when looking at our first three coal candidates. Alpha Natural Resources, Inc. (NYSE:ANR), Arch Coal Inc (NYSE:ACI), and James River Coal Company (NASDAQ:JRCC) are all trading for less than half their tangible book value. James River slumped below the 1:1 mark in late 2011, and Alpha and Arch fell beneath last February.

ANR Price / Tangible Book Value Chart

ANR Price / Tangible Book Value data by YCharts.

But coal candidate No. 4 offers a more expensive option: Peabody Energy Corporation (NYSE:BTU) , the largest coal company around, is trading at 1.3 times its tangible book value. The company dipped briefly below during the dog days of summer but has historically maintained a higher valuation than its competitors.

BTU Price / Tangible Book Value Chart

BTU Price / Tangible Book Value data by YCharts.

The differences between Peabody and its peers are numerous, but they boil down to two rudimentary factors: management effectiveness and international exposure.

Peabody’s pretty price
Management inefficiency can be a drain on any company, but it is life and death for energy corporations. Selling coal comes down to cost effectiveness, and cheaper always wins. The first and most important metric to measure management effectiveness is gross margins.

BTU Gross Profit Margin TTM Chart

BTU Gross Profit Margin TTM data by YCharts.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!