Cloud Peak Energy Offers Chance To Triple Investments

Cloud Peak Energy (CLD) has been underperforming the market like the rest of the coal sector for the last six years. Cloud Peak is one of the few coal companies that is profitable and free cash flow positive. Despite rising costs from more regulation and competition from cheaper energy sources like natural gas, Cloud Peak has been able to maintain its profits and produce free cash flow. Since the whole coal market is in a depression, it has created an opportunity for investors to invest in a profitable coal company selling for 20 cents on the dollar.

Key Stats

Market Cap: $283.4 million

Current Market Price: $4.55

Pretax Earnings Per Share: $2.15

Earnings Per Share: $1.29

Free Cash Flow Per Share: $1.30

Earnings Power Value: $15.63

Discount Cash Flow Value: $13.37

Earnings Yield: 30%

Forward Rate of Return: 55%

EV/EBIT: 3.2x

P/E: 3.5x

P/FCF: 2.5x

P/TB: 0.28x

P/DCF: 0.11x

Business Overview

The company was formed through a spin-off from Rito Energy America in 2009 and is headquartered in Wyoming. Cloud Peak operates three mines throughout the United States and owns a 50% stake in Decker Coal Company, which operates the Decker Mine in Montana. The company has proven and probable reserves of 1.1 billion tons with an average margin of $3.2 since 2010. Coal Creek's cost per ton is $10.2 and in 2015 the price estimated to be around $12 and $13 per ton. During the first quarter of 2015, the company shipped 19 million tons of coal for an average price of $13 per ton.

Financial

First Quarter 2015 Highlights

During the first quarter of 2015, the company sold 19 million tons at an average price of $13 per tons. Cloud Peaks' adjusted EBITDA for the first quarter was $44 million versus $41 million from the year-ago quarter. During the first quarter, the company's cost per ton was $10.2. Coal Peaks' operating cost fell 40% during the first quarter thanks to lower fuel costs. The company's revenues fell by less than 1% to $317 million and net loss decreased 70% to $4.2 million. Revenues for the company's Logistics and other related activities segment increased 19% to $69 million. Corporate and other segment increase of 20% to $5.2 million. The company's foreign segment increased from $893,000 to $9.4 million and the company's mine segment decreased 3% to $261 million.

Valuation

Cloud Peak is selling for 3x earnings, 3.2x EV/EBIT, 0.2x Tangible Book, 2.5x Free Cash Flow and 0.11x Discounted Cash Flow. The company has an earning yield of 30% and a forward rate of return of 55%. Based on multiple valuation methods, it’s clear that Cloud Peak is undervalued with a large discount from business value and share price. The coal industry is selling for 8.9x EV/EBITDA, while Cloud Peak is selling for half that value a 4.5x EV/EBITDA. If the company sold at the same EV/EBITDA as the industry does, then it would sell for $38.25/share.

Despite the all the new regulation and more competition, Cloud Peak has been able to maintain its profits and produce free cash flow. When valuing the company through discount cash flow, I used a discount rate of 20% and the company's ten year average free cash flow. This gives the company a present value of $13.37 per share. Based on discount cash flow value method, Cloud Peak is selling for a 65% discount from fair value. Cloud Peak based on multiple valuation methods has a value range of $13.37 to $38.25/share.

These value methods don't take in to account the value of the company's proven and probable reserves. Cloud Peak has a total value for its proven and probable reserves between 2.2 billion and 3.3 billion or $40 to $51/share. Based on both asset value and cash flow value, the company is undervalued and offering potential investors the chance to make 3 to 10 times their money. When you bring in Cloud Peaks' proven and probable reserves, the company could be a Peter Lynch ten-bagger.Â