$1 Billion Buyback And Synergies Will Unlock Coal Opportunities

Key Takeaways

• The $1 billion share repurchase program could enhance earnings per share by reducing the number of outstanding shares.
  
• Merger synergies and cost reductions are expected to improve net margins and overall profitability.
  
• Operational and pricing challenges, alongside risks in synergy capture and restricted reinvestment, threaten Core Natural Resources' margins and long-term growth.

Catalysts

Produces, sells, and exports metallurgical and thermal coals in the United States and internationally.

• Core Natural Resources has initiated a $1 billion share repurchase program as part of a robust capital return framework, aiming to return 75% of free cash flow to shareholders, which could impact earnings per share positively as shares outstanding are reduced.
  
• The company is expecting to capture between $110 million and $140 million annually in synergies following a recent merger, which could lead to improvements in net margins and overall profitability.
  
• Expanded market opportunities, such as blending and cross-selling of coal products, are anticipated to result in revenue uplift through enhanced pricing strategies, potentially leading to increased revenue.
  
• The company is successfully reducing costs by eliminating overlapping corporate positions and achieving significant procurement efficiencies, expected to enhance net margins and reduce cash costs.
  
• With expectations of a tighter supply-demand balance in global coking coal due to underinvestment and depletion in reserves, Core anticipates improved pricing power in the future, which may support revenue and cash flow growth.

Core Natural Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Core Natural Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Core Natural Resources's revenue will grow by 25.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.1% today to 12.4% in 3 years time.
• The bearish analysts expect earnings to reach $534.9 million (and earnings per share of $13.02) by about May 2028, up from $286.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Core Natural Resources Future Earnings Per Share Growth

Risks

• The combustion event at the Leer South mine highlights operational risks that can lead to production delays and increased costs, negatively impacting Core Natural Resources' net margins.
  
• Current softness in pricing for key market segments such as global metallurgical and high calorific value thermal coals could lead to decreased revenues for Core Natural Resources.
  
• The volatility in coal prices and ongoing issues with tariffs, such as the Chinese tariff on U.S. coal imports, could pose risks to Core Natural Resources' earnings if trade flows remain disrupted.
  
• Core Natural Resources faces potential risks in successfully implementing their synergy capture strategy post-merger. Failure to realize projected $110 million to $140 million in synergies could result in lower than anticipated net margins and earnings.
  
• The transition to a capital return framework, with substantial share buybacks and dividends, may limit the company's ability to reinvest in operations, potentially impacting long-term revenue growth.

Valuation

• The assumed bearish price target for Core Natural Resources is $75.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Core Natural Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $75.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $534.9 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of $75.26, the bearish analyst price target of $75.0 is 0.3% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.