Is Alpha Natural Resources a Buy After Earnings?

With shares of Alpha Natural Resources (NYSE:ANR) trading around $9.06, is ANR a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementCoal Mining

Alpha Natural Resources posted third-quarter 2012 earnings on November 2 that attracted some favorable attention for investors. Shares shot up as much as 8 percent in the morning before settling to close up 2.26 percent.

The company reported an adjusted net loss of $0.16 per share, but beat an expected loss of $0.44 per share by 28 cents.

E = Debt to Equity Ratio is Close to Zero

ANR’s debt-to-equity ratio of 0.59 looks pretty good compared to those of its major competitors. Peabody Energy Corp. (NYSE:BTU) currently holds a debt-to-equity ratio of 1.06, while Arch Coal Inc. (NYSE:ACI) currently has a debt-to-equity ratio of 1.45.

It’s also important to consider total debt and total cash on hand, which for ANR is $2.99 billion in total debt, and $353.3 million in cash. This reveals a slightly higher debt load than its debt-to-equity ratio reveals at first glance. Peabody Energy currently holds $6.36 billion in total debt, and $648 million in cash, while Arch Coal carries $4.58 billion in total debt, and $650.11 million in cash.

T = Technicals on the Stock Chart are Strong

As of November 2, 2012, the stock price is 7.94 percent above its 20-day simple moving average, or SMA; 18.20 percent above its 50-day SMA; and 28.21 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in a downward trend, losing 58.9 percent value this year to date, and 62.1 percent year over year.

E = Earnings are Increasing Quarter over Quarter

ANR has been posting positive revenue growth since 2007. While earnings have taken a hit in the last year, the company is staying smart and staying lean, keeping its balance sheet in mind and finding a production balance despite turbulent economic conditions.

Year 2007 2008 2009 2010 2011
Revenue ($) in millions 1,878 2,469 2,493 3,919 6,982
Diluted EPS ($) 0.43 2.36 0.63 0.78 (3.76)

(Fiscal year is January-December.)

Quarter Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 2,243 2,276 1,899 1,840 1,630
Diluted EPS ($) 0.29 (4.11) (0.13) (10.14) (0.21)

 

T = Trends Support the Industry in which the Company Operates.

ANR has clearly had some hard quarters. In 2011 – and still – cheap natural gas cut deep into the coal industry, driving prices lower and piling on losses. Natural gas prices have come up slightly recently, but the trend in America seems to be toward cleaner-burning gas. Coal stocks in general have seen something of a rally in the past few months because of speculation surrounding the election – Mitt Romney likes coal, remember – and hope that the economy in China will rebound and bring demand with it.

Coal is by no means dead. According to the U.S. Energy Information Administration, coal was the fuel for 42 percent of the electricity generated in the U.S. in 2011. Natural gas accounted for 25 percent of the power, nuclear for 19 percent, renewable for 13 percent, and petroleum for less than 1 percent.

Conclusion

In the last month, ANR’s stock price has come up over 40 percent, but the real value of the stock remains a mystery. So much is contingent on policy and the global economic condition that it is hard to determine whether or not shares are returning to a fair value or if this is a coal industry dead-cat bound.

Because of this, and the metrics above, Alpha Natural Resources is a Wait and See. If Mitt Romney wins the election, it is reasonable to expect coal bulls to charge. If not, the fate of the industry rests with the global economic outlook, particularly coming out of large, rapidly industrializing economies like China and India. Either way, with the election still looming, the stock looks too volatile.

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