With oil prices soaring, demand for quality coal, high in heat and low in sulfur, has surged -- and so have the stocks of coal companies. One big producer is Alpha Natural Resources (ANR ), whose shares have heated up from 19 to 27 since it went public in mid-February. Bill Harnisch, CEO of hedge fund Peconic Partners, a big energy investor, thinks Alpha has a lot more steam left in it. He visited its mines in Appalachia and came out impressed with its operations: "Alpha is a cheap energy play with a strong earnings-growth kicker." Peconic owns 3 million shares, or 3% of the stock. Alpha has 64 mines with 500 million tons of proven and probable reserves -- worth about $30 billion at current coal prices. It produces 20 million tons a year, half of it metallurgical coal. Alpha ships 40% of that to coke or steel producers overseas, including Japan and Brazil. Its steam coal goes to electric utilities, mainly in the U.S. Based on Alpha's strong earnings and cash flow, Harnisch figures the stock will hit 40 in a year. He sees earnings of $1.47 a share in 2005, $2.60 in 2006, and $3.40 in 2007 -- vs. 2004's 48 cents. Mike Dudas of Bear Stearns (BSC ) says coal's tight supply and rising prices should provide Alpha with strong cash flow, revenue, and earnings growth at least through 2007, when he sees it earning $3.25 a share. He rates the stock "outperform."
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial