The Zacks Coal industry stocks, are suffering due to a decline in the use of coal in thermal power plants in the United States. In 2024, the demand for coal will be adversely impacted by the planned retirement of coal units and the utilization of more renewable sources for electricity generation. The ongoing energy transition, with utility operators steadily phasing out coal units, may hit the coal industry. Then again, the continuing conflict between Russia and Ukraine is creating fresh demand from European coal-importing countries. Despite a drop in coal production, export volumes and stable coal production assets are likely to boost the prospects of coal stocks like Peabody Energy BTU. Other coal stocks like Warrior Met Coal, Inc. HCC, SunCoke Energy Inc. SXC and Ramco Resources Inc. METC with high-quality production volumes are expected to gain during this difficult phase.
About The Industry
The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined through the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity and manufacture steel and cement. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many more years. Five states in the United States contribute nearly 70% of the yearly production of coal and 60% of the coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal indust
3 Trends Likely to Impact the Coal Industry
U.S. Coal Production Drops: Per EIA’s projection, coal production in the United States is expected to drop in 2024 and 2025. EIA projects U.S. coal production to decline 4% from the earlier projection to about 470 million short tons (MMst) in 2024 and register a much sharper decline of nearly 6.3% to 456 MMst in 2025 due to the expected reduction in coal usage in electricity production. This would hurt coal operators as they fight a tough battle against other cleaner sources of energy.
Despite Reliability, Emission Policy to Hurt Coal Industry: Coal is still a reliable source of energy and ensures 24x7 electricity production from the generation units. However, increasing emission concerns are resulting in reduced usage of coal in electricity generation. The United States’ Sustainability Plan includes an aim toward transitioning to 100% carbon-pollution free electricity by 2030 and achieve net-zero emission by 2050. The utility operators are now focused on generating more electricity from clean energy sources, lower coal usage and gradually shut down the existing coal-based electricity generation units.
Per EIA, coal’s share in U.S. electricity generation would drop from 17% in 2023 to 15% in 2024 and further to 14% in 2025. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will continue to drop. Coal industry operators should brace themselves for challenges as several electric utilities have decided to become carbon neutral and are aggressively cutting down on coal usage.
Coal Industry’s Silver Lining is Rising Exports: Despite an expected drop in coal production volumes, coal operators in the United States can benefit from the expected rise in coal export volumes. Coal demand is expected to improve due to its economical pricing compared with other energy sources. Coal is still a viable energy option for many crucial industries across the globe. Per EIA, coal export volume in 2024 will drop from 2023 by 6.5%. However, export volumes in 2025 are expected to improve by 3.3% from the 2024 levels. The World Steel Association forecasts a rebound in global steel volume production, rising 1.9% in 2024 to touch 1,849.1 Mt. Steel production requires ample high-quality coal and nearly 70% of global steel production depends on it. With the continued recovery in steel production, coal exports are expected to pick up and improve in the long run.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Coal industry is a nine-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #240, which places it in the bottom 5% out of 252 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential.
Before we present a few coal stocks that you may want to keep track of, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms S&P 500, Beats Sector
The Zacks Coal industry has underperformed the Zacks S&P 500 Composite and the Zacks Oil and Gas sector over the past year.
The stocks in the coal industry have lost 0.8% compared with the Zacks Oil-Energy sector’s decline of 1.7%. The Zacks S&P 500 composite has rallied 24.8% in the same time frame.
One Year Price Performance
Coal Industry's Current Valuation
Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
The industry is currently trading at a trailing 12-month EV/EBITDA of 3.4X compared with the Zacks S&P 500 composite’s 14.8X and the sector’s 3.8X.
In the past five years, the industry has traded as high as 7.6X, as low as 2.01X and at the median of 4.6X.
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector
4 Coal Industry Stocks to Keep a Close Watch On
SunCoke Energy: Lisle, IL-based SunCoke Energy is a raw material processing and handling company serving steel and power customers, with principal businesses in coke making and logistics. With an annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal exports and increasing demand for met coal from the steel industry. The company plans to invest in the range of $75 million to $80 million in 2024 to expand its operations. The Zacks Consensus Estimate for 2024 and 2025 earnings per share has moved up by 75.5% and 26.5%, respectively, in the past 60 days. The current dividend yield of the company is 3.7% compared with its industry’s yield of 0.57%. The stock has gained 12.7% in the past three months against the industry’s decline of 4.4%.SunCoke Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SXC
Peabody Energy: St Louis, MO-based Peabody Energy engages in the coal mining business and has thermal and metallurgical operations. In 2023, nearly 25% of the company’s revenues were derived from five customers with whom it still has 13 coal supply agreements (excluding trading and brokerage transactions) expiring at various periods from 2024 to 2025. This assures a steady flow of revenues. The Zacks Consensus Estimate for Peabody Energy’s 2024 and 2025 earnings per share has moved up by 0.3% and 7.8%, respectively, over the past 60 days. The current dividend yield of the company is 1.2% The stock has gained 3.9% over the past three months. Peabody Energy currently has a Zacks Rank #3 (Hold).
Price and Consensus: BTU
Warrior Met Coal, Inc.: Brookwood, AL-based Warrior Met produces and exports metallurgical coal for the steel industry. The company will benefit from the end of the labor strike and the resulting incremental production volume as eligible employees return to work. Warrior Met plans to invest $435-$500 million in 2024 to further strengthen its coal operation. The company is presently developing its Blue Creek mine. The Zacks Consensus Estimate for its 2024 and 2025 earnings per share has moved up by 0.7% and 3.1%, respectively, in the last 60 days. The current dividend yield of the company is 0.56%. The stock has gained 0.6% in the past three months.Warrior Met Coal currently carries a Zacks Rank of 3.
Price and Consensus: HCC
Ramaco Resources, Inc.: Lexington, KY-based Ramaco Resources is the developer of high-quality, low-cost metallurgical coal and is poised to benefit from improving metallurgical coal demand. The company now expects its 2024 production volume to be in the range of 4-4.4 million tons. Depending on demand, the company can increase coal production volumes from the current levels. The Zacks Consensus Estimate for Ramaco Resources’ 2024 earnings has moved up by 20.3% in the last 60 days. The current dividend yield of the company is 3.06%. The stock has gained 5.8% in the past three months. Ramaco Resources currently has a Zacks Rank of 3.
Price and Consensus: METC
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