Coal stocks have had a bad couple of years. Companies have suffered as coal prices have fallen steadily since 2011 due to the huge amounts of new supply entering the market with little pickup in demand. Since 2011, steelmaking coal has fallen by over 60%, while thermal coal, which is used in power generation, has dropped around 40%.
With the exception of diversified miner BHP Billiton Limited (ASX: BHP), many major coal miners have seen their share prices fall in the last 12 months. Shares in Whitehaven Coal Limited (ASX:WHC) and New Hope Corporation Limited (ASX: NHC), for example, have lost nearly 20% over the past 12 months, and between 40% and 80% over the past two years.
Stay away from the mining stocks
As the coal price continues to plunge, and even more supply is coming online in the coming years, I believe it's prudent to avoid coal miners for the time being. Instead, investors should look at other companies that stand to benefit from an increase in supply (i.e. tonnage).
Transport Companies
One company particularly exposed to an increase in coal volumes is Aurizon Holdings Ltd (ASX: AZJ). Aurizon is the re-badged QR National, which was floated by the Queensland Government in 2010 and previously had the ASX ticker QRN.
Aurizon Holdings
Aurizon's assets are primarily located in Queensland, where it operates the coal transport networks in the central and south-east of the state. It also has smaller operations in WA servicing iron ore companies, and in New South Wales servicing coal companies in the Hunter Valley.
Aurizon has staged an incredible revival since listing in 2010. Boosted by increased volumes from Queensland's coal miners, Aurizon has increased revenue by 30%, earnings before interest and tax by 100%, margins by 50%, and underlying net profit by 180% in just three years.
In light of the improved operating performance, management recently announced an increase in dividend payout from 50% of earnings to between 60% and 70%. This will improve shareholder returns at a time when Aurizon's management team is delivering huge efficiency gains and expanding its Queensland rail network to service new mines.
Foolish takeaway
Aurizon Holdings is a quality company with what appears to be a management team making all the right moves. Investors should be buoyed that the huge profit and margin increases have been made on much smaller revenue growth, and that new mines opening in NSW and QLD in coming years should allow volumes, and thus revenue, to increase further. The management team is extremely experienced, the company controls long-term leases and while the coal price has fallen, mining companies are confident enough in its future to continue investing in new mines. All signs are positive in my eyes.
