HardAssetsInvestor

Written by Julian Murdoch  |

August 21, 2008

Revaluing Coal?

Details

Coal companies have been hot this year, but the recent crash is both confusing and troubling.

• The current price market
• A checklist on Arch Coal
• Fundamental P/E devaluations?

 

 

A while ago, energy and energy stocks were the hottest thing since Google. But that bubble may have burst - or has it?

We've been harping enough about the downturn in oil prices recently; instead, let's take a look at the other black gold - coal, and in particular, one U.S. company - Arch Coal (ACI).

Step into my time machine...

A year ago, Arch Coal's stock price was sitting around $30. The company was plugging along, doing its thing, mining coal and making money. Energy prices (aka our friend crude oil) started rising and coal headed along for the ride. It didn't hurt that global coal demand was increasing (thanks China!) while supply was tightening. Supply, demand ... not surprisingly, coal got a bit more expensive, with the priciest Northern Appalachian coal running from under $50/ton to over $150/ton in less than a year.

 

Source: DOE Coal News and Markets

 

The stock market noticed, and by June 9, ACI's stock hit its high of $75.44.

Since then, however, things haven't been as rosy.

 

 

 

The pullback that began in July has continued into August, wiping out most of this year's gains. Even the second-quarter report of tripled earnings wasn't enough to do more than briefly bump the price up. (Granted the bump was 10% - nice if you got the timing right. But it didn't erase the summer tumble in the share price.)

It's Tough All Over

Van Eck launched their Market Vectors Coal ETF (KOL) on Jan. 10, 2008. Since it tracks the Stowe Coal Index - an index of coal miners and related companies - it's as good a barometer for the industry as any.

 

 

 

During the time period covered by the ETF, Arch Coal's stock is up 19%, while KOL is up less than 1%. In other words, Arch has been a bit of a golden child in the industry. But since Arch Coal hit its high on June 9, KOL has dropped 27% and ACI is down 37%. That's quite a slide in just a couple of months.

Given that I wrote about coal last month, when the bloom was just coming off the rose, I thought it worth taking a deeper look at Arch and seeing what the deal is here. Here's a little "what the heck" checklist for dealing with a big drop.