Alpha Natural Resources only trades at 20% of its book value, making it effectively the cheapest stock in the stock market.
In times of normal profitability, the company regularly trades at 2-3x book value, suggesting room for significant capital appreciation if steam and coal rebounds.
This stock is not for conservative or retirement investors, as the lack of profitability in the past 3-4 years puts this company in the realm of speculative investing.
If you truly have an interest in investing in the style of Benjamin Graham, then you must look to the most unpopular sector of them all: coal. No one wants to touch coal stocks these days because (1) they are facing increased regulation, leading many to believe that they are ultimately doomed businesses, and (2) they are currently losing money, which is not usually something that tickles the fancy of non-speculative investors.
Still, for those who mean it when they say they are looking for “value” in today’s stock market, there is no better place than Alpha Natural Resources (ANR). I meant what I said in the headline: this is the cheapest stock in the stock market.
What’s my basis for this conclusion? The company currently trades at $3.76 per share. The book value per share, meanwhile, is $18.16. Alpha Natural Resources is trading at 20% of its book value, making it extraordinarily primed for substantial capital appreciation (perhaps a quintupling of the stock price, conservatively estimated) if the company ever returns to a prolonged period of profitability. As reference, it’s been a long time since that happened (in 2010, the company made $263 million, and has not been profitable since).
If Alpha Natural Resources returns to profitability, the rewards for buying it here could be enormous. Think of it this way: before the coal industry began experiencing long-term losses in 2011, coal companies regularly traded at 2x or 3x book value during the profitable years. In 2007, the company’s book value was $5.79 per share, and the stock regularly traded at over $12 per share. In 2006, when the book value was $5.30 per share, the stock regularly traded above $15 per share. The company was making $10-$20 million in profit per quarter, and that’s why you saw the premium to book.
Based on the current book value of $18.16, a prolonged return to profitability in a “realistic good case” scenario would be consistent with very significant wealth creation. If Alpha Natural Resources returned to profitability consistently for two or three years, you could very realistically be looking at a situation in which the stock would be trading at $36-$54 per share. Given the current share price of $3.76, you can see the immediate appeal.
To be clear, though, this potential for very significant capital appreciation in the event of a turnaround is no free lunch. Alpha Natural Resources lost $1.1 billion last year, is expected to lose $800-$900 million this year, and gives investors no indication that a return to profitability will occur immediately. If the status quo for the company were to continue indefinitely, this company would go bankrupt, and therein explains why you have the opportunity to buy the stock for only 20% of book value.
My expectation would be that, for the next year or two, long-term shareholders will have to deal with a barrage of negative headlines reporting poor business results for Alpha Natural Resources. Eastern Steam Coal shipments are down almost 35%, cutting demand for shipments by over 20% in the steam divisions (and keep in mind that the steam division accounts for 75% of Alpha Natural Resources’ total volume, with the other 25% coming from metallurgical coal). Revenues in the coal division are still experiencing double-digit declines in the 10-20% range, and there is no indication that this will change in the immediate term.
The company does possess the current finances to ride out another few rough years if need be. Of the $3.39 billion carried in debt, over $3.36 billion of it is classified as long-term debt (Alpha Natural Resources carries almost no short-term debt). The company also has a stockpile of over $500 million in immediate cash on hand, and over $2 billion in assets. Financing at Alpha Natural Resources would become an issue if: (1) the company experienced higher losses than anticipated going forward, in the $1 billion range, and/or (2) the losses continue for more than three or four years, and the business does not start to turn towards profitability by 2018 or 2019.
There are two rationales that could possibly support making Alpha Natural Resources the cheapest stock in the stock market. One, it is plausible that although the current coal and steam economics are rough, the current price of the stock is unduly pessimistic because it is almost unheard of for a coal company to only trade at 20% of its book value. And secondly, if Alpha Natural Resources returns to profitability within the next 3-4 years, and that is a big if, the current $3.76 price could reasonably quintuple and still be below its 2014 book value (and the stock tends to trade at 2x or 3x book value in healthy times).
This isn’t a stock for retirement accounts. It’s not a stock for conservative investors. You’ll be able to feel the speculation in the air as you execute your buy order. But you are applying the “margin of safety” principle to price that Graham was famous for advocating if you purchase a stock at 20% portion of its book value and hold on. At today’s price of $3.76, a slight turn towards profitability for the coal industry could send the price of this stock significantly upward, given its historical relationship to book value when the coal industry is profitable.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)