3Q miss due to Buchanan, but relative story intact -Goldman Sach - October 31, 2007
What's changed
Our takeaways from Consol’s 3Q earnings were:
(1) Current EPS was a loss of -$0.03 but that included a $0.45/share cost associated with the Buchanan mine shutdown, something that was expected,
(2) Disclosure on pricing shows a trend upwards with 62.9mm tons contracted at $42.33/ton for FY08 compared to FY07 tonnage estimated to be at $40.68/ton,
(3) mgmt was quite positive on the potential for an upward swing in pricing as the strong worldwide met market could impact the US steam market.
Implications
While we are still Cautious the coal sector, we continue to believe that Consol is well-positioned relative to other producers given the location of their mines allows them to benefit from continued scrubber installations. Additionally, a strong met market should benefit Consol more so than other steam producers. We are updating our FY07-FY09 EPS estimates to $1.79, $2.80, $3.80 from $2.29, $2.64, $3.12 to account for the latest quarter’s reported information and guidance. Our out-year estimates have risen slightly due to a stronger pricing environment. We maintain our relative Buy rating in the context of a Cautious coverage view.
Valuation
We are changing our 6-month target price to $53 from $44.50 due to slightly higher forecasts as well as a higher multiple (we now model in towards the top half of the historical FY2 EV/EBITDA range of 4.8-8.3X). We have increased the multiple assigned given the strong overall energy environment as well as improvement in coal spot pricing. Our price target is derived from an equally weighted average of three valuation analyses: EV/EBITDA multiple on FY09, SOTP analysis, and normalized P/E analysis.
Key risks
(1) Tighter than expected inventory balance drives stronger than expected pricing industry-wide,
(2) Pricing rises even with a high inventory levels,
(3) CNX is unable to attain our forecasted pricing. |
