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6 ways to invest in the coming coal boom
(Page 2) of 2
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Consol is a supplier of high-sulfur coal, which isn't as much of a disadvantage as you might think. With new scrubbers to reduce emissions coming on line in 2006, demand -- and prices -- for high-sulfur coal will pick up. Having already made the fixed investment in pollution-control equipment, the utilities can only reap the advantage in variable transportation costs by sourcing coal from nearby, high-sulfur deposits. Consol's production is overweighted to high sulfur Northern Appalachian coal, and the company will benefit disproportionately from increases in the price of that type of coal. A reasonable target price for December 2006 is $91 a share.
Peabody Energy gets the best of the low- and high-sulfur worlds. The company's Powder River Basin coal is low in sulfur even for coal from that region, producing about 70% of the sulfur dioxide as average Powder River Basin coal. That will get Peabody Energy premium prices in any recovery in Powder River Basin pricing. The company's higher-sulfur Illinois Basin coal is close to a likely concentration of new power plants that will go into construction in the next decade. In addition, the area is a hotbed of coal-to-liquid activity. (This technology converts coal into diesel fuel.) That should also increase demand for Peabody's coal from the Illinois Basin. A reasonable target price for December 2006 is $99 a share.
Generating returns
I think you'll find even better pickings among the shares of the companies that make the steam turbines that will go into coal-burning power plants. (It certainly doesn't hurt, as Bear Stearns notes, that these companies are looking at exploding demand for all types of power plants in Asia, and the need to replace about 40% of existing thermal power generation equipment over the next five to 10 years.)
My favorite in this sector is not General Electric: The company is a big producer of natural-gas-fired turbines, so while it's picking up sales of coal-fired turbines, it will also be losing sales of gas-fired equipment. The stock is cheap after its recent earnings disappointment, and I'd certainly reconsider my position if the company wins out in its bid with Hitachi (HIT, news, msgs) to buy Westinghouse, a major producer of nuclear power plants. The company is bidding against Toshiba (TOSBF, news, msgs) and Mitsubishi Heavy Industries (MHVYF, news, msgs) to buy Westinghouse from current owner British Nuclear Fuels. The winner will quickly become the leader in the race to build nuclear power plants in China. China has said it plans to build 320 nuclear power plants by 2020.
My favorite isn't Siemens, either. I owned Siemens in Jubak's Picks from November 2005 through January 2006, for a 23% gain. The stock now looks like it's correcting from that rocket ride -- news of a bribery investigation at one of the company's subsidiaries hasn't helped -- and I'd prefer to buy these shares after the sell-off is completed.
My favorite in the sector is Alstom. The Paris-listed company has undergone a restructuring even more extensive than Siemens', and, in 2005, the work started to pay off. The restructuring under CEO Patrick Kron, who joined the company in 2003, repaired a balance sheet that was seriously overleveraged. Orders have picked up -- climbing 66% in the third quarter of fiscal 2006, a number the company reported on Jan. 12, 2006. That in turn has stabilized operating margins in the power-turbine business -- at a projected 2.3% in 2006 -- and given credibility to projections of 6% to 7% operating margins by 2008.
The company is highly leveraged to the power-generation market -- more so than either General Electric or Siemens -- with about 80% of earnings before interest and taxes coming from the power-equipment and service markets. And although the company sells equipment across all fuel types -- coal, gas and hydro -- it is much more leveraged to the coal-fired steam-turbine market than its larger competitors. Alstom holds the top market share in the steam-turbine market, according to Bear Stearns, which also projects annual average earnings growth of about 20% for Alstom over the next five years.
Alstom is only listed on the Paris market -- it doesn't trade as an ADR, or American depositary receipt. You can buy the stock -- and track its price -- under the symbol AOMFF on our site. Buying Alstom will get you foreign ordinary shares, exactly the same shares that trade on the Paris exchange. Be careful when you buy -- try a limit rather than a market order -- because the bid/asked spread can be high. It was almost $1 a share when I checked on Jan. 20. You may also have to pay an extra commission charge to buy the ordinary shares. An electronic brokerage firm I use regularly quoted me an extra $50 fee.
Despite all those hurdles, I still think Alstom is worth it as the best pure play I've found on the trend toward coal. I'm adding it to Jubak's Picks with this column.
Updates
Buy Alstom (AOMFF, news, msgs)
Coal is the fuel of the future -- for the next five to ten years anyway, and Alstom is my favorite way to play that trend. The Paris-listed company's restructuring started to pay off in 2005 with orders climbing 66% in the third quarter of fiscal 2006, which the company reported on Jan. 12, 2006. That in turn has stabilized operating margins in the power turbine business -- at a projected 2.3% in 2006 -- and given credibility to projections of 6% to 7% operating margins by 2008. The company is highly leveraged to the power generation market -- more so than either General Electric (GE, news, msgs) or Siemens (SI, news, msgs) -- with about 80% of earnings before interest and taxes coming from the power equipment and service markets. And although the company sells equipment across all fuel types -- coal, gas and hydro -- it is much more leveraged to the coal-fired steam turbine market than its larger competitors. Alstom holds the top market share in the steam turbine market, according to Bear Stearns, which also projects annual average earnings growth of about 20% for Alstom over the next five years. Alstom is only listed on the Paris market -- it doesn't trade as an ADR. You can buy the stock -- and track its price -- under the symbol AOMFF on our site. Buying AOMFF will get foreign ordinary shares, exactly the same shares that trade on the Paris exchange. Be careful when you buy -- try a limit rather than a market order -- because the bid/asked spread can be high -- it was almost $1 a share when I checked on Jan. 20. You may also have to pay an extra commission charge to buy the ordinary shares. An electronic brokerage firm I use regularly quoted me an extra $50 fee. (When I calculate the gain or loss on this position when I sell I will include that extra fee along with the usual commission charges.) As of Jan. 23, I'm setting a target price of $76 a share by December 2006.
New developments on past columns
3 picks for the dog days of summer: In my Aug. 26 column, I argued that growth was picking up in Japan and that the Japanese stock market could well outperform the U.S. stock market over the next year. Business and consumer confidence in Japan has surged after the landslide electoral victory by the ruling Liberal Democratic party government of Junichiro Koizumi. And the economy is now strong enough, in my opinion, to shake off the jitters of the Tokyo Stock Exchange. Mitsubishi UFJ Financial Group (MTU, news, msgs), hit my March 2006 target at the close of September after a 26% advance, and on Oct. 4 I upped my target price. Now on Jan. 24, I'm going to increase that target again on extremely aggressive comments from Nobuo Kuroyanagi, the CEO of what is, after the merger of Mitsubishi Tokyo Financial Group with UFJ Holdings, the world's largest bank -- by assets. What I liked about Kuroyanagi's remarks was the CEO's emphasis on making the world's largest bank also the world's most profitable. In the fiscal year that ends on March 31, Mitsubishi Tokyo Financial Group expects net profit of $4.55 billion: Kuroyanagi's goal is to increase that to $10 billion by 2008. That would close the gap with Citigroup (C, news, msgs), which earned $17 billion in net profit in 2004. Citigroup is now the top bank in the world -- by stock market capitalization. As of Jan. 23, I'm setting a target price of $17 a share by September 2006, up from the prior target of $15.60. (Full disclosure: I own shares of Mitsubishi Financial Group.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Mitsubishi Tokyo Financial Group. He does not own short positions in any stock mentioned in this column.
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