Tennessee-based mining company Alpha Metallurgical Resources, Inc. (AMR) processes and sells metallurgical (met) coal and thermal coal in Virginia and West Virginia. Despite pandemic-induced disruptions in the supply of coal, AMR’s efforts to allocate capital for projects to diversify its product offerings and its long-standing contractual arrangements have helped the stock gain 370.6% in price year-to-date and 128.9% over the past three months. In addition, its Met segment revenue surged 4.7% sequentially to $376.8 million in its  last reported quarter.

Although an improved pricing environment has helped strengthen AMR’s Met business, its heavy debt load and decreased cash balance due to inventory build could limit AMR’s growth. Furthermore, the company’s revenue growth is not being translated into profits.

So, here is what we think could influence AMR’s performance in the coming months:

Coal Industry Headwinds

Although coal production has improved significantly from last year, it is unlikely to match the substantial increases in demand from the electric power sector in the near term due to capacity constraints at coal mines and limited available transportation. In addition, the growing demand for renewable energy and plans by governments worldwide to pursue energy decarbonization  could make it harder for the coal industry to sustain its growth. World coal consumption declined 4.2% in 2020, according to bp’s Statistical Review of World Energy 2021. In addition, the supply disruptions resulting from a dispute between Australia and China could negatively impact ARM’s business.

Mixed Growth Story

A $471.8 billion consensus revenue estimate for the current quarter, ending September 30, 2021, represents a 42.7% increase year-over-year. Analysts expect AMR’s EPS to rise 174.7% year-over-year to $2.8 in the current quarter. However, the company failed to beat the consensus EPS estimates in three of the trailing four quarters.

AMR’s revenues and EBITDA have decreased at CAGRs of 6.2% and 22.9%, respectively, over the past three years. The company’s tangible book value declined at a 28.2% CAGR over this period. But its total assets have increased at a 22.6% annualized rate over the past three years.

Mixed Financials and Profitability

AMR’s total revenue increased 11.7% year-over-year to $395.28 million for the second quarter, ended June 30, 2021. Its adjusted EBITDA grew 462% from the prior-year quarter to $39.9 million. However, AMR’s operating cash flow stood at a negative $6.3 million, while net loss came in at $18.6 million. Its interest income declined 98.1% from the prior-year quarter to $104,000 over this period. And its  cash and cash equivalents declined 52% year-over-year to $168.89 million for the six months ended June 30, 2021. As of June 30, 2021, its long-term debt stood at $550.26 million.

AMR’s  9.4% trailing-12-month gross profit margin is 69.1% lower than the 30.4% industry average, Also, its net income margin, ROE, and ROA stood at negative 15.3%, 61.2%, and 13.3%, respectively. However, its 0.8% trailing-12-month asset turnover ratio is 15.3% higher than the 0.7% industry average.

Consensus Price Target Indicates Potential Downside

Currently trading at $53.51, analysts expect the stock’s price to hit $0.9 in the near term, indicating a 98.3% potential decline.

POWR Ratings Reflect Uncertainty

ARM has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. ARM has a C grade for Growth and D for Stability. The stock’s mixed growth prospects and a relatively high 1.25 beta justify these grades.

In terms of Quality Grade, ARM has a C. The stock’s negative trailing-12-month ROE and ROA are consistent with this grade.

Beyond the grades we’ve highlighted, one can check out additional ARM ratings for Sentiment, Momentum, and Value here. ARM is ranked #64 of 88 stocks in the B-rated Industrial – Services industry.

Bottom Line

While a significant surge in the Met segment sales in the last reported, substantial capital investment and an improved pricing environment quarter have been driving up the price of ARM’s shares, the growing preference for renewables and declining coal consumption could cause  the stock to lose momentum in the near term. Furthermore, its heavy debt load and uncertain growth prospects could add to investors’ concerns surrounding the stock. So, we think investors should wait for some improvement in its growth prospects before investing in the stock.

How Does Alpha Metallurgical Resources (AMR) Stack Up Against its Peers?

While ARM has an overall POWR Rating of C, one might want to consider taking a look at its industry peers, Heritage-Crystal Clean, Inc. (HCCI) and EMCOR Group, Inc. (EME), which have an A (Strong Buy) rating

AMR shares rose $0.02 (+0.04%) in premarket trading Monday. Year-to-date, AMR has gained 370.62%, versus a 19.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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