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business newsInternational Coal Is a Hot Stock
By
Justin Sharon
Dec 17, 2010 4:50 pm
Shares ended up, although well off earlier highs, on a Bloomberg News report that larger rival Massey Energy may be interested in making a bid.
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Shares in the Appalachian outfit ended up, although well off earlier highs, on a Bloomberg News report that larger rival Massey Energy (MEE) may be interested in making a bid. Although any article that references “three anonymous sources with knowledge of the matter” clearly can’t be totally taken to the bank, the market apparently still sees a diamond in any potential deal for a firm that owns a dozen mining complexes in West Virginia, Kentucky, Virginia, and Maryland.
According to Bloomberg, talk of a combination began in the summer, lay dormant for a spell, but has since acquired renewed impetus after the December 3 announcement that Massey CEO Don Blankenship will retire two weeks from today. None too soon, in the eyes of many. While BP's (BP) wayward Tony Hayward remains much more widely known by the public after his ham-handed handling of April’s oil spill, Blankenship was similarly in charge of an energy giant that experienced a disaster that actually involved a far larger loss of life that same month, and demonstrated arguably even greater subsequent ineptitude. A blast at its Upper Big Branch mine killed 29 employees, even after which he claimed to have a “totally clear conscience” on the matter.
International Coal is itself no stranger to tragedy, operating the Sago, West Virginia facility where 13 men were trapped and all but one lost their lives after a harrowing methane explosion several years ago. The fact that ICG chief Ben Hatfield was Massey’s COO until 2001 also appears to be giving additional substance to the reported negotiations. This may seem an old-hat industry conjuring up images of industrial revolution smokestacks, and many maintain that hype about clean carbon is a myth. It’s certainly not as sexy as much-touted alternative energies such as solar, wind, oil sands, and -- to take 2006′s green flavor or the month, one which has quickly crashed and burned -- ethanol.
But King Coal is not going away any time soon. It’s still the largest source of power for electricity generation globally, and almost 70% of the world’s steel is produced using it, a figure not destined to decline given the inexorable rise of India and China. International Coal controls 1.1 billion tons of Btu, sulfur, and metallurgical reserves, including that which can be used in steel making, so it's an undeniably attractive candidate in a quickly consolidating industry. With the average markup for deals in the sector standing at some 26% in 2010, canaries in the mine potentially stand to profit handsomely.
Still, ever-increasing environmental regulations are always a concern in this sector, so absent any deal there may be no need to run over hot coals just yet.
Please see Massey Energy Expects Q3 Loss, CEO Continues Stoking Fires of Hell With Own Product, The Bullish Potential for Coal, and Increased Demand Could Boost Coal ETFs.
Moving from MEE to MI, today’s ticker shock involves arguably the most successful, if unexpected, Marshall Plan since 1947. Marshall & Ilsley Corporation (MI) shares are surging more than 18% to top the entire S&P 500 Index after the Milwaukee-based regional bank surprised investors by announcing it's being bought by Bank of Montreal (BMO).
Our own Sean Udall was quite right in describing the bid as being both “out of left field” and a “huge surprise” on the Buzz & Banter today. Indeed, only last week a well-respected Evercore equity analyst essentially dismissed the likelihood of such a sale. Bank of America/Merrill Lynch research, which incredibly enough launched coverage on the sector only 48 hours ago and called Marshall & Ilsley “our top pick” even as “others remain on the fence” regarding the name, deserve kudos for an incredible call, or at least dumb luck. (Full disclosure: I used to work there, although anyone who caught my morning dig at the less-than-frugal office furnishing tastes of its ex-CEO can’t claim I’m a cheerleader.)
The Canuck company, whose native country emerged from the Great Recession in far better shape than our own, is paying $4.1 billion in stock for a firm founded a year before the California Gold Rush. In doing so it acquires an outfit that operates about 160 branch offices with an especially heavy presence in Arizona.
This could kick-start another round of M&A activity in the space and it certainly makes much intrinsic sense for Marshall, which still has ample amounts of toxic commercial real estate exposure on its books. The takeout price was essentially only tangible book value, which is no great multiple. Credit quality, while improving, remains weak, and in an environment of 9.8% unemployment small- and mid-size banks are in no position to rebuff any offers. Jeff Davis, banking analyst at Guggenheim Partners, said the fact that “there are a lot of banks that are so severely challenged from an asset quality perspective” could result in more mergers in 2011, further boosting the space.
Each Friday the Wall Street Journal publishes a list of bank failures, a depressing litany that currently stands at 151 and counting. The figure a few hours from now will show an inevitable increase, but at least the industry can today celebrate a notable success story.
Turn to Why Investors Are Running to Regional Banks and Why Small Banks Are the Key to Recovery for more.
Johnny Bench was a key member of the Big Red Machine back in the day but green is the color of screens over at 300 Johnny Bench Drive this afternoon. Shares in Oklahoma fast-food firm Sonic (SONC), which calls the street home, are up more than 8%. This on an announcement late yesterday that it intends to repurchase some $62.5 million of senior notes.
The drive-through chain operates about 3,500 locations in 42 states. Its roller skate-clad carhops are pure Americana, befitting an outfit whose burger and root beer roots date to Eisenhower-era 1953. Its mantra is all about Happy Eating and late, great Happy Days star Tom Bosley was a spokesman.
Further boosting the equity is an Outperform-from-Neutral boost by analysts at Cowen & Company this morning. Sonic Chairman and CEO Clifford Hudson hailed the buyback of Class A-1 variable funding senior notes as an example of employing “excess cash effectively to reduce debt and strengthen our balance sheet.”
Industry competition and intense discounting in a still-sluggish economy could give investors indigestion. But with hamburger sales in this country amounting to more than $63 billion annually, and expected to increase at a 5% compound clip over the next half decade, the stock still has ample opportunity to plump up.
The Origins of Cult-Favorite Fast Food Restaurants has additional analysis on the industry.
We’ll finish our fly-over tour by going from Oklahoma City to Overland Park, Kansas. (It’s good for us narcissistic New York navel gazers to know that there’s also plenty of profits to be made out on the prairie.) With fully 50% of long-haul drivers being either overweight or obese, much more than the population at large -- witness Trucking Industry Healthier Than Truckers Themselves -- it’s likely that pit-stopping YRC Worldwide (YRCW) employees represent a lucrative revenue stream for Sonic. But no one can begrudge them a celebratory feast frenzy tonight, with shares in the transportation titan finishing higher by double digits. After all, it could be their last supper.
The 86-year-old firm formerly known as Yellow Freight ended in the black big time today after a US District Court confirmed ahead of the opening bell that rival Arkansas Best (ABFS) unit ABF Freight Systems lacks the authority to sue it over an agreement YRC Worldwide recently inked with the Teamsters. Given that this union was once headed by Jimmy Hoffa, I hesitate to say the verdict is embedded in concrete, but it certainly seems set in stone.
This is undeniably a near-term catalyst for YRC, which provides all manner of freight forwarding and logistical tractor trailer services, and whose better-known brands include New Penn and Holland. However, expensive labor costs and restrictive employment rules have led to extremely anemic operating margins relative to other less-than-truckload competitors. It’s a systemic challenge that even today’s dose of good news doesn’t change.
Keep On Trucking and Pet Sales and Trucking Blues provides related content.
No positions in stocks mentioned.
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