On evaluating two coal stocks, Hallador Energy Company (HNRG) and American Resources Corporation (AREC), I found HNRG a better choice for investors. In this piece, I have discussed what makes HNRG’s prospects brighter than AREC's amid the rising demand for coal.
Before we compare the fundamentals of these two stocks, let’s see what’s happening in their industry.
The world’s energy demand is growing with time, and so is the transition from non-renewable energy sources to renewable ones. However, given the massive demand for energy, coal, and other non-renewable energy sources are still far from getting replaced.
To meet the world’s growing energy demand, there has to be a steady source of energy available at a cheap cost. The production of non-renewable energy sources such as solar and wind power is expensive, failing to achieve economies of scale. This is one of the primary reasons why coal is still in high demand despite its high carbon footprint.
Last year, global coal consumption levels reached an all-time high, driven by India and China. According to the World Bank, the average annual coal prices are forecast to decline in 2023 compared to last year. However, it will remain well above the five-year average.
As per the International Energy Agency, global electricity demand is expected to grow at a much faster pace of 3% per year during the 2023 to 2025 period, compared to the 2022 growth rate driven by an increasing global population. U.S. coal production is expected to rise by 2% between April and May as producers prepare for increased electricity demand during summer.
However, U.S. coal production is expected to decline by 3% year-over-year to 577 MMst in 2023. Coal use is expected to grow in the emerging economies in Asia to fuel their economic growth.
During the first quarter, HNRG’s coal margins increased 12.2% year-over-year to $17.07 per ton. The company produced 2 million tons of coal and shipped 1.70 million tons during the first quarter. It managed to reduce bank debt by $10 million during the quarter. Also, its contracted coal in 2023 remains healthy at 5.8 million tons, with an estimated price per ton of $57.
HNRG’s President and CEO Brent Bilsland said, “We have delivered strong back-to-back quarters of increasing EBITDA and ongoing debt reduction, which has significantly delivered our balance sheet to 1.2 times debt to EBITDA. We expect coal pricing for the balance of the year to remain robust, and we are excited by additional opportunities for coal, electricity, and capacity sales on the horizon.”
AREC’s coal sales during the first quarter declined 3.4% year-over-year to $8.72 million. Also, its revenue came 13.1% below analyst estimates. The company expects its McCoy Elkhorn complex to be the major growth driver for its American Carbon division. It expects to add a second operating section at its Carnegie 1 mine that will add incremental metallurgical carbon production feeding to its onsite processing facility at McCoy.
When it comes to price performance, HNRG is the clear winner. HNRG’s stock has gained 18% in price over the past nine months compared to AREC’s 36.3% decline. In addition, HNRG’s stock has gained 103.3% over the past year, higher than AREC’s 2.6% gain.
Here are the reasons I think HNRG could perform better in the near term:
Recent Financial Results
HNRG’s total revenues for the first quarter ended March 31, 2023, increased 219.7% year-over-year to $188.33 million. Its adjusted EBITDA rose significantly year-over-year to $34.02 million. The company’s tons sold increased 22.9% year-over-year to 1,693. Its net income came in at $22.05 million, compared to a net loss of $10.13 million in the year-ago quarter. Also, its operating cash flow rose 777.1% year-over-year to $26.11 million.
For the fiscal first quarter ended March 31, 2023, AREC’s total revenue decreased 2.3% year-over-year to $8.87 million. Its adjusted EBITDA loss widened 66.9% year-over-year to $1.59 million. The company’s loss per share widened 12.6% year-over-year to $3.10 million. Also, its loss per share came in at $0.04.
Expected Financial Performance
Analysts expect HNRG’s EPS and revenue for fiscal 2023 to increase 140.4% and 74.8% year-over-year to $1.37 and $632.70 million, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 133.6% and 10.7% year-over-year to $3.20 and $700.50 million, respectively.
For fiscal 2023, AREC’s EPS is expected to remain negative. On the other hand, its revenue for fiscal 2023 is expected to increase 75.9% year-over-year to $69.45 million.
Profitability
HNRG’s revenue is 12.51 times what AREC generates. Moreover, HNRG is more profitable, with an EBITDA margin and net income margin of 25.41% and 10.23%, compared to AREC’s negative 47.22% and 4.59%, respectively. Also, HNRG’s levered FCF margin of 16.62% compares to AREC’s negative 19.82%.
Valuation
In terms of forward EV/Sales, HNRG is currently trading at 0.59x, 225.4% lower than AREC’s 1.92x. HNRG’s trailing-12-month Price/Sales ratio of 0.57x is 375.4% lower than AREC’s 2.71x. Likewise, HNRG’s trailing-12-month Price to Book of 1.21x compares to AREC’s 16.18x.
Thus, HNRG is relatively more affordable.
POWR Ratings
HNRG has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, AREC has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. HNRG has an A grade for Value, in sync with its discounted valuation. AREC’s stretched valuation justifies its D grade for Value.
HNRG has a B grade for Sentiment, consistent with its favorable analyst estimates. On the other hand, AREC has a C grade for Sentiment, in sync with its mixed analyst estimates.
Of the 11 stocks in the A-rated Coal industry, HNRG is ranked #2, while AREC is ranked last in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Quality. Click here to view HNRG’s ratings. Get all the ratings of AREC here.
The Winner
Despite the gradual transition to clean energy sources, coal remains vital for the functioning of any economy. After coal consumption reached an all-time high last year, average annual coal prices are expected to decline in 2023 compared to last year, but they are likely to remain above the five-year average.
Although coal demand is expected to decline in some parts of the world, emerging economies like China and India are expected to use more coal to meet their growing energy needs. HNRG is a better choice than AREC, given its reasonable valuation, strong fundamentals, favorable analyst estimates, and strong profitability. The company also has strong contracts over the next few years.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Coal industry here.
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HNRG shares were trading at $8.89 per share on Tuesday afternoon, up $0.23 (+2.66%). Year-to-date, HNRG has declined -11.01%, versus a 9.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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