VALUE ADDED


Coal Burns Brightly

Steven Goldberg

High energy prices have helped cleaner-coal technologies gain momentum. Coal is cheaper than oil -- and demand will likely increase.



Nothing seems more old-fashioned -- nor more polluting -- than coal. It epitomizes smokestack America, its blackened smoke blanketing the sky.

But times, and coal, are changing. With oil prices stuck above $70 a barrel and no signs of global demand for energy slackening, technologies to produce cleaner coal are coming to the fore.

Bet that these technologies will continue to gain momentum. Coal is plentiful in the U.S. and other industrialized countries while oil appears to be available mainly in political hot spots, most notably the Middle East.

Coal is cheap -- only about one-third the cost of oil and natural gas on an energy-equivalent basis. Not surprisingly, the federal Energy Information Administration estimates that U.S. demand for coal will increase more than 50% in the next 25 years. China and India will almost certainly see prodigious increases in coal consumption.

Coal has already become a lot cleaner. Advanced scrubbers used in coal-fired electric generation and other plants can cut emissions enough so that even high-sulfur coal (the most polluting) can be produced relatively cleanly.

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More advanced technologies are expensive -- and only continued high prices for oil and gas will ensure that they come online.

Germany used coal gasification, a way of converting coal into nonpolluting synthetic natural gas, during World War II. But it hasn't been economical since -- until recently. Another technique turns coal into liquid fuel. Other, newer technologies are also being developed.

Playing the mines

Turner Investment Partners, which runs several Turner funds and subadvises Vanguard Growth Equity, recently produced a terrific report on coal technologies. The firm recommends five coal stocks: "Their earnings generally have risen sharply over the past two years, and we think there's even more growth to come." Most of these stocks have moved up sharply, too. But there's still plenty of upside left in the stocks.

Arch Coal (symbol ACI) shrewdly bought up large reserves of low-sulfur coal when prices were low. Now it's reaping the rewards. Turner says Arch's technology allows it to operate mines 250% more productively (on the basis of output per man hour) than its competitors do.

The stock has quintupled in the past three years. Nevertheless, analysts on average expect Arch to earn $3.91 per share this year and $6.82 next year, according to Thomson First Call. That gives it a price-earnings ratio of 25 on this year's estimates and 15 on next year's.

Looking for more diversification and, thus, a somewhat steadier ride? BHP Billiton (BHP) is an Australian mining company that produces everything from diamonds to uranium to copper. But coal accounts for a big swath of earnings. BHP is expected to earn $3.13 per American depositary receipt this year and $3.22 next year. That makes its P/E 15 on this year's estimate and 14 on next year's.

Consol Energy (CNX) is a huge producer of high-sulfur coal. As technology improves, so should its fortunes. It's expected to earn $4.98 a share this year and $6.45 next year, giving it a P/E of 17 on this year's earnings and 14 on next year's.

How about a smaller-cap coal play? Turner's favorite is Foundation Coal Holdings (FCL). Public only since late 2004, the company has a $2.4 billion market value. It trades at 25 times this year's anticipated earnings of $2.05 a share and 17 times next year's estimated earnings of $3.03.

Turner's last pick is Peabody Energy (BTU), the world's largest coal company. It trades at 28 times estimated earnings for this year of $2.34 a share and 19 times next year's estimated earnings of $3.48.

Be cautious with these stocks. All have had big moves in recent weeks and months. Earnings and stock prices are up sharply over the past couple of years. Any sign of global economic weakening would hurt the stocks. So would evidence of rapprochement with Iran.

But both these events seem unlikely. And you shouldn't avoid a stock just because it has already gone up -- so long as the price and the outlook remain reasonable.

Prefer a fund? I've favorably mentioned RS Global Natural Resources (RSNRX) and T. Rowe Price New Era (PRNEX) many times. Both own loads of coal shares.

Opinions expressed in this column are those of the author.




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