Coal is the Energy Underdog – Westmoreland Coal is the Tops

Written by GSCR Staff   
Thursday, 10 November 2016 07:43

The Cleveland Cavaliers. The Chicago Cubs. Donald Trump. 2016 has no doubt become the year of the underdog. Not matter what your feelings are about Trump, the fact is that this presidential election is probably the biggest upset since ‘Dewey Defeats Truman’. President Trump still does not roll off the tongue all that easily. Even we had serious doubts about the victory and had an article all set for yesterday related to Smith & Wesson Holding Corporation (NASDAQ – SWHC) and what we perceived as at least four more years of attacks on guns from President Clinton. The stock dropped 15% yesterday. We had to look elsewhere.

“We are going to put the coal industry out of business” is one of those quotes Ms. Clinton probably wishes she could take back. Along that line, a reversal of President Obama’s assault on coal is at the top of Trump’s campaign promises. There are many candidates here but we believe Westmoreland Coal Company (NASDAQ – WLB - $15.12). The stock popped 18% yesterday! The one year chart is shown below which illustrates the stock is now trading well above the 50-day EMA.

WLB 1-Year, 50-day EMA

(Source: www.otcmarkets.com)

MM.11.10.16.WLB-1yr-50dayema

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The Company operates through four segments: Coal - U.S., Coal - Canada, Coal - WMLP, and Power. It produces and sells sub-bituminous coal and lignite to power plants. The Company owns and operates coal mines in Montana, North Dakota, Texas, and Ohio, the United States; and Alberta and Saskatchewan, Canada. As of December 31, 2015, it had total proven or probable coal reserves of approximately 1,222 million tons. The Company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854 and is headquartered in Englewood, Colorado.

Wall Street consensus estimates for revenue and corresponding EPS and P/E are all moot at this point so we must look at some other measurements. On the technical side, the short float is currently at 6%, which is a tad high normally, but given the fact that the entire coal industry has been clobbered this number actually looks positive. An operating margin of 3.6% is another major factor in giving us faith that the Company is running at a relatively high efficiency and can meet or exceed future EPS estimates. A metric that is more important than ever. Finally, and this may be a little bit of a stretch, but M&A activity could pick up next year as large energy companies look to possibly add coal back to their portfolios. The all-important Enterprise Value to EBITDA ratio is a low 6.2.

The energy underdog coal is back en vogue under new leadership. WLB is set to capitalize. We think a target of $20 is possible even as soon as the end of 1Q 2017.

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