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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Battered Coal Industry Still Boasts A Few Good Opportunities

For all the talk about oil, natural gas, and renewable energy, one energy commodity gets very little press; coal. Yet coal is still one of the major sources of power around the world, and in the fastest growing area of the world, it is the dominant source of energy.

Fast-growing Asian economies like Vietnam, China, India, and Indonesia are all building new coal plants at a rapid clip. And while a lot of commentators have pointed out how problematic China’s slowdown is for commodity prices, including coal, very few investors seem to be paying attention to what certainly looks like it could be the world’s next great growth story: India.

Coal is past its heyday in the U.S. and Europe, where renewable energy and natural gas will continue to eat away at coal’s market share. But in Asia that is not the case, there coal is still king. And Asia makes up most of the world’s population and the bulk of its future economic growth. Related: Warren Buffett And Elon Musk To Spark A Lithium Boom

U.S. investors looking to benefit from this trend can play the story a few ways. Certainly U.S. coal companies could see some benefits, but unfortunately those benefits will probably be small. It costs a lot to ship coal, and it’s not clear the U.S. has a sustainable advantage in producing coal for Asian use.

Investors could also look to invest in major manufacturers like Emerson which sell equipment to coal-fired power plants. Those revenues are relatively small in comparison to the size of the firms though.

Finally, investors could try and invest in the company’s building or operating the plants. But while U.S. companies like Fluor Corp. do international power construction work, most of this business is going to names that just are not investable. Related: Ongoing Security Concerns In Kurdistan Have Oil Companies On Edge

Instead, investors should consider a little known equipment manufacturer whose shares have been hammered by the global commodities slump. Joy Global is a less-diversified and smaller version of Caterpillar. The company makes mining equipment and has significant exposure to the coal markets. Coal miners figure prominently among the firm’s biggest customers. As a result, the stock has been slammed this year recently falling below $30 a share to rival the same price levels the stock sold for at the height of the Great Recession.

Joy is a profitable company that even pessimistic analysts think will earn $2.12 per share in 2016 at the trough of the commodities market. The firm has low debt, and earned more than $7 a share in 2012. Times have clearly changed since then, but even if the firm continues to earn at trough levels, the valuation here is very cheap.

Further, Joy has starting to diversify its business, and the firm generates more than enough cash to pay a healthy 3 percent dividend. The company has also bought back about 5 percent of its outstanding share float in the last few years. Related: 9 Reasons Why We Should Be More Worried About Low Oil Prices

Joy definitely carries some risk, but the firm is a well-known entity in mining circles and makes specialized equipment that few competitors offer. The coal mining slump is not going to last forever, and as long as Joy continues to be prudent with its cash, the company should emerge from the other side just fine. At this valuation, investors with a long-term outlook who believe in the growth of Asian economies (and their need for power) should carefully consider JOY.

By Michael McDonald Of Oilprice.com

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