Today we’ll look at a sector that’s really been struggling: the cheapest coal stocks in the stock market.

Coal stocks were once a vital holding in any portfolio. Because coal stocks in general are “must-own” stocks because coal plays a central part in everyday human life, coal was always present.

That changed under the Obama administration, which effectively declared war on coal.

The sector has struggled mightily as the government tried to put it out of business. Despite President Trump’s commitment to reinvigorating the black fuel, we haven’t seen the comeback many had expected.

Coal stocks have gotten hammered. That may mean opportunity.

The Cheapest Coal Stocks For 2019

If you’re in a hurry, below are our picks for the lowest priced coal stocks as of this writing.

1. Peabody Coal: The largest coal play in the world.
2. CONSOL Coal Resources: Benefits from new regulations and a high yield.
3. BHP Group Limited: Diversified mineral play, with emphasis on coal.

Keep reading and you’ll find out more about these inexpensive coal stocks and my thoughts on each.

What Are Coal Stocks?

By coal stocks I refer to companies that are involved in the manufacturing, production or distribution of coal. Coal mining is not the only aspect of the coal business, so you should try and diversify.

There are four elements to coal that investors need to understand. The first is that are four types. Lignite, Sub-Bituminous, Bituminous, and Anthracite. They are divided based on the amount of carbon in each – 30%, 40%, 70%, and 95%, respectively.

There is coal production. 26 states mine coal, and used to produce over a billion tons per year. Production is either surface or mined underground.

Pricing is important also, because coal is the cheapest source of fuel.

Finally, there is the transportation aspect. Coal is usually moved by train, truck, or barge.

The U.S. has about 30% of global coal reserves, representing some 275 billion tons. If the coal industry were permitted to produce at a level to meet demand, there would be enough here in the US for 250 years worth of consumption.

How Do You Determine What Qualifies As The Cheapest Coal Stocks?

The cheapest coal stocks have at least two of these three characteristics:

1. Positive cash flow
2. Manageable debt
3. Earnings growth

Positive cash flow

With all the struggles the coal industry has endured, now is more important than ever to have positive cash flow. Readers of my column know that I consider cash flow to be perhaps the most important metric to judge a company’s health.

Usually I write about companies with lots of cash flow that helps the company grow and pay dividends. In this case, however, cash flow is needed for pure survival.

Manageable debt

For many years, balancing coal supply and demand was not a difficult task. There’s plenty of coal and coal mining companies. However, because of the EPA’s regulations under the previous administration, supply was thrown into disarray.

With coal companies unable to meet demand due to restrictions on mining, cash flow faltered. For companies with a lot of debt and/or high interest debt service, times got very tough.

We need coal stocks to have manageable debt, so as to not risk bankruptcy.

Read Also: Best Stocks Under 29 Dollars In 2019

Earnings growth

Normally, we like to see any company consistently grow earnings. For a commodity and energy play like coal, that growth is going to vary based on supply and demand.

So I don’t expect the cheapest coal stocks to generate double digit earnings growth, or even single digit growth on an ongoing basis.

But I want to see earnings growth of some kind on a fairly regular basis, especially now that the hardest of times has passed. If a coal stock is still showing faltering earnings, it makes me wonder about its ability to manage itself going forward.

Here’s a video that provides some additional information on investing in coal stocks.

Peabody Energy

 

What is it?

Peabody is the largest coal pure-play company, with 23 mining operations in the U.S. as well as Australia. It handles mining, preparation, and sale of thermal and metallurgical coal. This coal is mostly supplied to electricity utilities, industrial firms, and steel manufacturers.

To hedge its mining operation, Peabody also is involved in both brokered and direct trading of coal, and also offers transportation services.

Peabody trades coal on over-the-counter and exchange markets, but only trades bituminous coal, mostly because it’s challenging to transport.

Peabody is a bit of a risk. It actually declared Chapter 11 bankruptcy in 2016, but has roared back to life.

What makes it a cheap stock?

Peabody Energy was in big trouble in 2016. By 2014, it had already accumulated $6 billion in debt, which rose to $7.7 billion by 2016. Having incurred multi-year losses under the onerous regulations of the EPA, losing almost $3.5 billion from 2014 – 2016 and cash flow negative, it declared bankruptcy and reorganized.

Today, it sits in a much better position. It has $1.37 billion in cash, offset by a manageable $1.33 billion in long term debt. Most importantly, cash flow has returned to the company. In the past twelve months, it has generated $2.15 billion in operating cash flow and $1.9 billion in free cash flow.

Peabody has also returned to profitability, generating $660 million in profit in the past year.

Earnings growth is unclear, though. Analysts are hedging estimates, waiting to see how demand shapes up going forward. As the price of oil and natural gas fall, there is less demand for coal.

Still, the stock trades at only 6x trailing net income.

Peabody Energy has another big advantage. Its US mining output has long term contracts with utilities, so the business is stable. The Australian business is where the trading mostly occurs. Foreign buyers in southeast Asia and India pony up sizable amounts to purchase the coal. This is known as the seaborne market and its providing tailwinds for Peabody.

Also, over in Japan, some 30 coal power plants are either under construction or in the planning stations. India is also doubling its coal capacity, making it a major buyer. Its demand is up 20 million tons this year alone, and that’s demand for seaborne coal on top of its own production.

China is importing coal at peak levels, with 27 million tons imported just through September of last year alone.

Thus, Peabody has a strong foreign seller’s market in play.

CONSOL Coal Resources

What is it?

Consol both produces and sells what is known as “high-Btu thermal coal”, mostly from its 25% ownership position in a Pennsylvania mine. This bituminous coal is then sold to electric utilities.

What makes it a cheap stock?

What’s so special about a coal miner in Pennsylvania?

All the positive trends going for Peabody are in place with CONSOL, also, particularly the foreign markets. Those markets don’t purchase coal just from Peabody. That’s the most attractive angle to CONSOL, but there are a few others.

Even during the coal downturn, CONSOL was still mining and selling coal, to the point where it was still profitable in the toughest years. Net income was $23 million in 2015, $19.4 million in 2015, $34 million in 2017, and doubled to $68 million in the past year.

Importantly, however, CONSOL really kept an eye on its business and generated positive free cash flow these years — $42 million, $61 million, $53 million, and $78 million, respectively.

That leads us to the other attractive thing. CONSOL is a Master Limited Partnership, meaning it pays out most of its cash flow as a distribution. That distribution rate is currently 12.77% annually. I caution that anything can happen and that rate may not continue, but even at 6%, it’s very attractive.

Finally, its long term debt has been stable for several years, at a mere $167 million. Debt service is well-covered by cash flow.

BHP Group Limited

 

What is it?

BHP looks for, then acquires and develops natural resources – petroleum, copper, iron ore, coal, and all the major metals: copper, silver, lead, zinc, uranium, and gold. It also has all the support services for these mined resources, including transport, finance, trading, marketing, and mining.

What makes it a cheap stock?

BHP Group is the diversified play on coal, if you are uncomfortable with going pure-play. It’s also a $122 billion company, so it isn’t going bankrupt as a result of coal troubles.

Coal accounts for 19% of its cash flow, with iron ore at 39%, copper at 28% and petroleum at 14%. All have hit record production levels recently, and this is happening even as the company reduced costs by about 3%. The economies of scale that come with an operation this large can be seen with those cuts.

BHP has $19 billion of cash on hand, offset by $24 billion in manageable debt.