According to Mr David Martin Deutsche Bank analyst, investors need to be very choosy if they’re considering coal stocks particularly in the current environment.

Mr Martin lowered his price targets on the companies he covers by about 15% although he upgraded two companies that he thinks can outperform despite the difficult environment.

He said that “The most material and consistent change in our underlying assumptions is volumes as Deutsche Bank now forecasts 2012 US and global GDP growth of 2.5% and 3.8% respectively. Industry volumes will moderate in H2 2011 and we expect steel production to growth less than 4% in ’12 (vs 6%) and in coal, output is forecasted to increase less than 2% in ’12 (vs 3%) partially attributable to lower exports.”

But two companies stand out, because the market is giving them too little credit for their assets.

Mr Martin said “Arch Coal has been an underperformer year to date and we see limited value currently being assigned to its met business with it trading at 1x BV and at about 10x our trough EBITDA estimate of USD 800 million, therefore risk-reward attractive in our view. Meanwhile, we see Peabody Coal as a market leader with attractive assets, market positions & long term growth potential and we see BTU as a portfolio buy particularly during uncertain times.”

Mr Martin is less optimistic about the prospects for James River Coal, however, given the “scale of estimate cuts earnings risks, leverage position, and that we see better value elsewhere in our coverage.”

He downgraded the stock to Hold from Buy.

(Sourced from blogs.barrons.com)