MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

Wall Street Analysts Don’t Know What to Make of Teck Resources Ltd.

Typically, Wall Street expectations for a stock are relatively similar; few analysts want to take the career risk of a dissenting opinion. For this reason, many investors tend to take consensus expectations with a grain of salt. Still, it’s rare to see completely opposite ratings on a stock, especially when both opinions were rendered on the same day.

Last month, Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) was upgraded to buy from hold at BB&T Corporation, but was downgraded to sell from hold at Deutsche Bank AG. What should you make of this?

BB&T takes a bold stance

With a $10 price target (equating to 95% upside), BB&T’s stance is perhaps the most aggressive. There are a few factors playing into their decision. It recently raised its 2016 and 2017 earnings estimates, saying that earnings appear to have finally bottomed. A big reason for the potential of earnings turning around is the apparent rationalization of industry supply.

Back in 2001 when the market was just catching on to the massive buying power of China, prices for metallurgical coal were around $50 per metric tonne. Prices then exploded, reaching roughly $250 in 2010. To meet China’s burgeoning demand, massive amounts of supply were brought in. With higher prices, operators were able to develop more supply than the market had seen in its entire history.

Due to rising supply and slowing demand growth from China however, prices started to slip in late 2010, hitting a current price of only $130 per metric tonne, a near-decade low.

There are some signs that the market is turning around. Numerous major producers such as Patriot Coal Corporation, Walter Energy, Inc., Peabody Energy Corporation, Arch Coal Inc. and Alpha Natural Resources, Inc. are all in various stages of financial distress. Eventual bankruptcies and production shutdowns will inevitably help rationalize supply.

But can Teck survive to enjoy better prices?

Deutsche Bank contends that rising net debt levels are a key concern behind its downgrade to sell. Deutsche Bank isn’t alone. In September Teck saw its credit rating downgraded to junk status by Moody’s Corporation because they “expect prolonged commodity price weakness and sizable investment spending will cause Teck’s financial leverage to remain well in excess of typical investment-grade thresholds through at least 2017.”

Currently, long-term debt stands at nearly $7 billion versus a market cap of only $4.1 billion. With negative earnings and massive spending plans, this situation will only get worse before any relief arrives. Next year, Teck will have an expected cash burn of $1.5 billion, with another $1 billion consumed in 2017.

While there are some reasons to believe that coal can rebound from its historic lows, there isn’t anything on the horizon that suggests that things will turn around quickly. The growth in China consumption is flagging, and industry supply is still holding stable as financially precarious competitors are still producing. While there is plenty of upside should industry conditions improve, keep mind that any investment is contingent on the market’s willingness to continue providing financing to an increasingly unpopular business.

Our TOP turnaround stock for 2015

When tech companies fall from grace like this Canadian icon did, it's typically impossible to regain relevance. Here at Motley Fool Canada, we think this company and its CEO are prepared to prove all of the doubters wrong. We have even named it one TOP turnaround stock for 2015. Will you be left on the outside looking in should our intuition come to fruition?

If you're a curious soul (like me), then you can download the name, ticker symbol, and price guidance absolutely FREE.

Simply click here to receive your Special FREE Report, "A Top Turnaround Stock Idea for 2015."

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.