Goldman Sachs is lukewarm about the coal industry in general, but sees a standout in SunCoke Energy (SXC).
Today, analyst Andre Benjamin upgraded the stock from Neutral to Buy, with a target price of $19, up from a previous $15. He writes that SunCoke is a name with “more resilient/defensive earnings, organic growth, and catalysts” ahead to boost the stock, and that its defensive coke business has limited risk exposure to China and natural gas, which should lead “to visible EBIDTA growth.”
He also maintained a Buy rating on Consol Energy (CNX).
However, overall Benjamin is unimpressed with the coal sector:
We view coal stocks primarily as a trading group that will present tactical opportunities for nimble investors if stocks are oversold. But we do not see enough strong positive catalysts for a sustainable group rally and would not build large long positions given our more cautious medium-term outlook. We see 8% average upside after cutting estimates and lowering our 6-month targets by an average of 15% on lower met/thermal volumes and prices.
We have lowered our 2012 Chinese steel production growth expectation to 2% from 6%. And Australia met exports continue to recover, with December 2011 and January 2012 the first months with 13 mn+ MT seaborne exports since December 2010. Even with a slight pickup in 2H China steel production we believe met coal prices will stay in a long cyclical pause, trading between $200 and $225/MT through 2013 before normalizing to $175/MT (mid-cycle) in 2014 as Australia supply growth displaces the most marginal US exports.
We believe milder winter weather and the resulting lower gas prices than expected will require incremental C2G substitution to balance the gas market, keeping thermal coal prices below mid-cycle until at least 1Q2013. Our new proprietary C2G sensitivity analysis supports our view that PRB and IB coals should be the main source of incremental demand lost in the coming months. We expect more production cuts to lead to a brief rebound in thermal demand/prices as inventories balance by mid-2013, followed by a multi-year secular demand decline driven by regulation beginning in 2014.
Still, while Consol and SunCoke stand out, he sees names with unpriced volumes and low-quality metallurgical coal mixes at risk for downside EPS this year. Given these concerns he lowered Arch Coal (ACI) to Sell from Neutral, cutting his target price by $4 to $10, while also maintaining a sell rating on Walter Energy (WLT).  He upgraded Patriot Coal (PCX) from Sell to  Neutral, as he sees a more balanced risk/reward and less downside risk for the name than Arch and Walter.
While maintaining a Neutral rating, Benjamin highlighted Cloud Peak Energy (CLD) as a potential acquisition for value-oritented investors, who can look past near term-headwinds and a lack of company-specific catalysts for the stock.
