Fording Canadian Coal Group (FDG) is a basic resource play. They mine coal. I like the idea of coal stocks as coal has become much cheaper than oil. And with new and improved coal scrubbers, even high sulfur coal has added value. Looking further, FDG seems to specialize in metallurgical coal for the steel industry.
The first number that hits you between the eyes on FDG is the dividend. Almost 14%. The next item that strikes me is how “cheap” the company is right now. By definition, MFI companies are all supposed to be “cheap” as that is how you make it through the screens. But FDG is the cheapest of the cheap. The chart below compares the trailing PE for FDG versus some other coal companies:
17.36 (next year)
13.09 (next year)
Why are they so cheap? Is everyone else dumb? Let us review the MRQ.
- Coal prices doubled in the 1st qtr 2006 from 1st qtr 2005.
- Canadian $ has strengthened vs. US dollar.
- Sales volumes in 1st Q 2006 actually dropped 9% measured in tons.
- Transportation costs are up 26% (mainly rail costs).
- Earning Yield: 15%
- Return on Capital: > 100%
- Current Price: $34.65 with 52-week range of $27.75 to $45.15
- Current Ratio: 1.42 with $320m of debt.
- Market Cap: $5.1b
Hmm, it is interesting that the amount of coal they sold in tons actually dropped 9%. They stated it was because delivery was refused and that contracts with China were cancelled. Perhaps with the strong Canadian Dollar vs. US Dollar companies are opting not to buy the Canadian Coal?
The debt seems a little bit high. I actually own CNX. They also have a high debt ratio, so perhaps that is “normal” in the coal industry. Cash must be pouring in, so you don’t need to keep much on hand (thus the high dividends).
FDG is a tough call. I will probably pass on them as (a) I already have CNX in my non-MFI portfolio and (b) I don’t feel happy about sales in tons dropping. If I didn’t have CNX and/or I wanted income from my stocks (not important right now), I think FDG would make it to the next cut.