Granite City And KRT Agreements Will Support Stability Despite Declining Analyst Projections

Key Takeaways

• Extension of Granite City contracts and new coal handling agreements stabilize revenues and support future growth amidst market challenges.
  
• Operational efficiencies and shareholder return strategies promise improved margins and potential stable or growing earnings.
  
• Anticipated challenges in securing agreements and dealing with lower margins, soft markets, and contract expirations could result in earnings volatility and strategic uncertainty.

Catalysts

Operates as an independent producer of coke in the Americas and Brazil.

• The extension of the Granite City coke-making contract through June 2025, with potential for a further extension, could stabilize revenues and provide continuity in operations despite current market challenges. This supports future revenue expectations.
  
• The successful signing of a new 3-year take-or-pay coal handling agreement at KRT with benefits expected to start in Q3 2025 can stabilize logistics segment earnings and support future revenue growth.
  
• The potential future development of the Granite City GPI project, though yet to be finalized due to external transaction delays, represents a significant growth opportunity that could enhance long-term revenue streams and provide strategic value.
  
• Improvements in operational efficiencies, particularly from anticipated improvements in coal-to-coke yields and lower corporate expenses, could result in improved net margins in the medium to long term.
  
• Continued commitment to returning capital to shareholders through dividends, despite industry challenges, indicates potential future shareholder value enhancement, supporting expectations for stable or growing earnings per share.

SunCoke Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SunCoke Energy's revenue will decrease by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.0% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $63.3 million (and earnings per share of $0.77) by about April 2028, down from $95.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.5x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

SunCoke Energy Future Earnings Per Share Growth

Risks

• The ongoing delays for an agreement on the GPI project and the blocking of the U.S. Steel Nippon transaction could lead to extended uncertainties, potentially impacting future revenue projections and strategic growth initiatives.
  
• SunCoke Energy's 2025 guidance anticipates a drop in adjusted EBITDA, primarily driven by lower margins at Granite City and Haverhill, which could affect overall earnings and free cash flow.
  
• The forecasted challenging market conditions in the steel industry, characterized by lower pricing and demand, could compress revenue and net margins further if conditions do not improve.
  
• The impact of soft spot coke market conditions and the potential reliance on spot sales due to unresolved contracts could lead to volatility in revenue and net income.
  
• The expiration of key contracts and the absence of one-time gains (such as the black lung liabilities elimination) in 2025 could negatively influence earnings, especially if new contracts are not secured or if market conditions remain unfavorable.

Valuation

• The analysts have a consensus price target of $12.0 for SunCoke Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $63.3 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 8.8%.
• Given the current share price of $9.23, the analyst price target of $12.0 is 23.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.