'Do Not', 'I Repeat Do Not' Buy the Dip in Coal Stocks - Goldman (ANR) (ANR) (BTU) (CNX)

November 9, 2012 9:07 AM EST
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Price: $11.16 -0.53%

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    7 Buy, 2 Hold, 1 Sell

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Since the results of the Presidential election coal stock have been under pressure, giving back on average 10% of the gains seen from hopes of a Romney victory and growing worries about Europe and the "fiscal cliff". This has some licking their chops and looking to buy the dip. But don't do it, say analysts at Goldman Sachs.

Today, the firm downgraded their view on the sector to Neutral from Attractive, only seeing 2% upside on average in the sector.

"We would not "buy the dip" in coal stocks, as our view thermal coal demand will be up 11% next year and met recover to $200/MT by 4Q 2013 appear priced in," analysts led by Andre Benjamin said.

They see four big-picture issues for the US coal industry medium-term: (1) declining US thermal coal demand as coal plant retirements accelerate in 2014-15; (2) US met coal exports being displaced by supply growth from Australia, China and others; (3) limited resource improvements to offset cost pressures and declining reserve lives; and (4) weakened company balance sheets that reduce flexibility for managements to navigate the challenging macro.

"We view coal stocks' recent rebound as pre-trading a cyclical recovery in 2013 that we believe will be temporary," analysts said. "Stocks could trade higher, but our Neutral coverage view reflects our concerns for a group at risk of going off a "recovery cliff.""

Those that can't help themselves should look to "winners" in the sector, Goldman said. They view SunCoke Energy Inc. (NYSE: SXC) and CONSOL Energy Inc. (NYSE: CNX) as "winners" given: 1) Lowcost, visible organic growth; (2) favorable resource base/capital structure catalysts for multiple expansion; and (3) strong balance sheet with flexibility to return cash to shareholders. Losers in the sector are Arch Coal Inc. (NYSE: ACI) and Walter Energy, Inc. (NYSE: WLT), both rated "Sell." Neutral-rated stocks in the sector include Alpha Natural Resources, Inc. (NYSE: ANR), Cloud Peak Energy Inc. (NYSE: CLD) and Peabody Energy Corp. (NYSE: BTU).

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