CEIX - Maintaining Strong Buy For Consol My Coal-Culations Show Further Upside

2024-01-16 23:49:45 ET

Summary

• CONSOL's stock has been on fire (+~55%) since I published my upgrade to Strong Buy in May, and I think there are more gains ahead.
• The Company continues to make healthy profits and buy back stock with 75%+ of its FCF, and commodities and coal may have just put in a significant low.
• CEIX has grown to one of my largest positions; I am holding all my shares and maintaining a Strong Buy rating.

Introduction

This article is an update to my prior ones on CONSOL Energy ( CEIX ): my first article, Initiation/Buy, was published on 2/26/23 , and my second article, upgrade to Strong Buy, was published on 5/8/23 . Please reference these for more background on the Company and my positions over time.

I initiated a medium-sized position in CONSOL in mid-2022, and added to my holdings over the last 12 months; coupled with share price appreciation, CEIX has become one of my largest positions. I am still holding all my shares as I remain very bullish on the company and stock moving forward. The thesis remains simple and intact and includes massive share buybacks, and we may have just hit a cycle bottom in commodities and coal. Technical analysis additionally shows me further potential upside ahead. Thank you for reading and let's dig in!

Thesis Intact, Company and Management Executing Well, Buying Back Shares

My original thesis for CONSOL centered around the fact that management simply needed to maintain business operations to buy back massive amounts of equity and drive shareholder returns. Since COVID, coal stocks have been valued as an industry in terminal decline, around ~2-4x EV/EBITDA. With such low valuations, investors have demanded companies like CONSOL commit to massive shareholder returns - and CONSOL has followed through by committing to use 75%+ of free cash flow each quarter to buy back shares.

When CEIX reported Q3'23 results on 10/31/23, they reported they used 77% of quarterly free cash flow to repurchase stock. During the calendar year 2023, the company repurchased roughly 15% of the shares outstanding! As a quick aside, remember equity repurchases drive the denominator down in EPS and FCFPS calculations, leading to a slightly outpaced increase in these metrics - for example, when shares decrease by 15%, EPS and FCFPS increase by +17.6% (1/0.85). Even if CEIX's equity never re-rates further and simply compounds at 17.6% for the next several years, I will be very happy.

The slide below from the Company's Q3 provides an excellent summary of financial accomplishments over the last several years, including bringing debt down significantly to de minimis levels, generating lots of free cash flow, and paying out earnings to shareholders through repurchases and dividends.

From what I can tell, the thesis and company performance remains completely intact; I expect CONSOL to continue making healthy profits and funneling them directly to shareholders.

One last thing I want to comment on here is CONSOL's significant transformation away from US thermal coal. As recently as 2018, essentially 2/3 of CONSOL's business was domestic thermal coal (US power plant generation). Even though I believe global coal demand is not going anywhere, there is evidence of declining demand in "developed" economies like the US due to thermal closures and environmental regulations. As such, CONSOL has consciously shifted its business away from this declining market and expects to have <25% of its sales to US thermal coal plants in 2024. See below:

I believe moving away from a declining market should warrant a higher multiple for CEIX over time, but I also think the company still does not receive enough credit for its progress. Many see it still as a "thermal/domestic thermal" coal producer with significant exposure to a declining market. In my view, however, as realized prices and revenue stability come in above expectations, shares will continue to march higher and may even re-rate.

Commodities and Coal May Have Confirmed a Bottom

Another major factor giving me significant optimism for CONSOL's share price returns over the next 12-18 months is the potential bottoming of commodities and coal. Everything goes through cycles, and with global central banks including the Fed now leaning toward easing, I believe there is a significant chance we see an upturn in commodity and good prices in 2024 and 2025. Manufacturing has already been in recessionary territory for 14 months, and looks ready to bottom/begin an uptrend:

PPIs look to be stabilizing, and will undoubtedly move in tandem with commodity prices:

Looking at the WisdomTree Commodity Index Tracker ( GCC ), I see bullish signs. There is a positive divergence in price, money flow (first panel), and momentum (second panel), along with a pickup in volume.

The ( DBC ) Invesco Commodity Index Fund looks similar.

Even a stabilization in commodity prices will likely reset sentiment on many commodity stocks. I expect related stocks to front-run and outperform the commodity indices.

I also want to highlight coal equities' excellent performance, even relative to other commodity stocks. According to Goehring and Rozencwajg's Q3 2023 Commentary :

From through to peak, coal equities have been the best-performing sector in every commodity bull market since 1900."

I see no reason for this to stop, particularly given low investment in coal partially due to ESG mandates.

Looking at coal prices, I think both McCloskey Indonesian thermal futures, as well as Australian Newcastle thermal futures, look ready for an upswing:

To me, the Indonesian thermal futures look stronger, as the Newcastle coal futures have a lower low on price (underlined in yellow), but I believe both look healthy.

In summary, I think commodities look to be stabilizing/headed for an upswing, and coal equities will respond very positively to this price movement.

Technical Analysis - Remains Bullish

Past readers will know I like to incorporate TA into my analysis to gain clues as to where security prices may go. It is not a perfect science, but the results have been pretty good so far and I find the roadmaps helpful. I will mention briefly that CEIX ended up hitting both of my upside targets from my last article almost to the T, and also predicted where price would begin consolidating again!

Here's my latest TA on CEIX. Please see my notes below the chart:

1. Price remains firmly in an uptrend, with price making higher highs and volume indicating steady trading even in the face of massive share buybacks.
2. Money flow (first indicator panel) remains very bullish with a positive divergence running all the way back through the end of 2021.
3. Momentum (second indicator panel) looks ready to put in a higher low and turn upward, with the more volatile stochastic indicator looking ready to bottom as well.

Given all of the clues from the chart above, and using Fibonacci extensions from the 2020 low and the 2023 low, I think a bullish scenario could take CEIX to around $175-180 by mid- or late-2025. This represents roughly a double from today's prices! In a more bearish scenario, CEIX could take longer to consolidate or even make a lower low this year, but I still see it turning upward by 2025 and hitting a PT of around $125 - about a 30% gain. I think this is less likely and the massive share buyback limits downside potential, but I do want investors to be aware of the potential downside. I still feel comfortable holding a large position in this security.

Summary/Closing

In conclusion, I think CEIX represents a compelling opportunity for investors willing to invest in commodity/coal companies, and the risk/reward remains extremely attractive. The Company does not need to "do" anything special for the share price to continue moving higher in my opinion, and management remains committed to the buyback plan. There will be a time to sell CEIX, but I do not believe that time will arrive until mid-2025 or beyond, approximately 12-18 months from now.

Thank you for reading, and as always, consider what is best for your individual risk tolerance, time horizon, and overall portfolio before making any financial decisions. Each investor's needs and allocations will differ, and this security may not be appropriate for you in size or at all. Do not make decisions based on any one viewpoint, including mine. Finally, I like to be active in the comments, so leave thoughts or questions below if you care to.

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