This week’s Focus Stock of the Week is James River Coal Company (JRCC: $15), which carries Standard & Poor’s highest investment recommendation of 5-STARS, or Strong Buy.
本周的“每周焦点股票”是James River Coal Company （JRCC: 15美元），标准普尔给予该股最高的“五星”投资评级（强烈买入）。
Thanks in large part to improved productivity, tighter cost control and rising realized price per ton sold, JRCC has begun what we view as a turnaround and has started to narrow its losses per share over the last three quarters. We believe this trend will continue as supply and demand levels in the global coal market improve over the next six to 12 months, which in turn should support higher coal prices. Production cutbacks, the idling of unprofitable mines and transportation slowdowns due to scheduled summer railroad maintenance will help reduce supply, in our view.
We expect demand to increase, as electricity generation expands during the summer burn season and growing Asian economies consume greater amounts of energy and increase their imports. China, for example, has recently become a net importer of coal, driving other Asian countries to search for new suppliers of coal, while India is also expanding its consumption of coal. Domestically, electric utilities have already started to reduce coal stockpiles as consumption increased with a higher number of heating days at the end of winter.
Under these improving industry conditions, JRCC’s 2008 volumes and realized prices will increase, by our calculations, which should drive revenue growth. As the company continues to drive further productivity improvements by closing high-cost mines, reducing the number of outside contract miners, and decreasing turnover and retaining more experienced miners, production cost per ton should decline. We see EBITDA margins expanding and losses per share narrowing due to these actions.
A recent refinancing has improved JRCC’s liquidity and debt expense, which has helped to alleviate some of the bearish sentiment on the stock, in our view. On February 26, 2007, the company entered into a $35 million revolving credit agreement and a $100 million term credit agreement. After repaying prior revolvers and letters of credit and satisfying bank covenant agreements, JRCC has approximately $34.9 million in available liquidity from this transaction, by our calculation. When combined with the $15.7 million cash on hand, JRCC has nearly $50.6 million in total liquidity, or $3.18 per share. In our view, this should help remove any overhang on the stock resulting from liquidity concerns, and allow the shares to trade closer to peer valuations.
We also believe JRCC could benefit from future potential industry consolidation as larger producers seek out small to mid-sized producers for their expansion efforts. Many larger competitors have indicated that they may look for producers that have high-quality, long-term reserves but that are also stressed by current pricing conditions relative to their average cash cost of production, have debt or liquidity issues that could limit the speed of their production or expansion or might have cash flow issues.
We view JRCC’s valuation as compelling, as the stock is trading at nearly a 25% discount to peers on an EV/EBITDA basis, despite the company’s substantial high-BTU, low-sulfur reserves that could support 22 years of production based upon current production levels. Additionally, JRCC has a broad customer base of primarily electric utilities, with no customer greater than 10% of sales. Based upon our calculations, we see cash costs per ton declining and cash flow improving over the next two years, which adds to the company’s appeal, in our estimation.
INVESTMENT RISKS 投资风险
Risks to our recommendation and target price, in our view, include lower-than-expected coal prices, productivity declines, increased supply costs, lower-than-expected demand trends and weaker-than-expected U.S. economic activity. Other risks include liabilities and fines associated with potential civil or criminal lawsuits by regulatory bodies or others due to regulatory violations or mine fatalities.
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