GöttErdämmerung?

2017 has not been kind to GE.  The share price is down 43% year-to-date, and there are more financial analysts betting on further weakness than on a rebound.

As we explained in a previous post, GE long benefitted from strong earnings from its financial business, one that was built on leverage, itself backed by the AAA credit rating of the industrial parent.

Blaming Jack Welch, the former CEO and architect of this strategy, is easy but to a degree unfair:  the real problem with the financial business was not so much the leverage as the excessive reliance on short-term funding. 

Fast forward to 2017.  The financial business is largely gone, except for the financing of airplanes and jet engines.  But the bureaucratic bloat has soared while the manic focus on performance and efficiency has gone by the wayside.

The worst example of such decay can be found in GE’s biggest division, Power.  There, management so misjudged demand that it is now cutting its 2018 forecast for the delivery of some gas turbines and related technologies by half!  For 2017, group earnings per share have been cut from $2 to $1.6 and now $1, a stunning miss for a US blue-chip.

Is GE on its way to mediocrity and even failure?  The market seems to believe so.  This perception is driven by (1) the realization that turning around a company of this size is difficult and takes times (years most likely, which is longer than most investors can wait for), and (2) the fact that the new CEO gave a sober but far from inspiring vision for the future.

Before addressing these two issues, it is worth considering the scope of this company:

·       It manufactures almost two thirds of the engines that power the world commercial jets, and

·       It manufactures 30% of the world power generating plants.

Just imagine what would happen to the world economy if tomorrow these jet engines and these power plants were suddenly taken off-line…I think this puts GE's global reach, importance and therefore value potential into proper perspective.

Getting back to the market doubts.  Clearly, turning around Power will take several years, especially if the industry overcapacity persists.  But that doesn’t mean notable progress can’t be achieved within the next 6 months.

Likewise, the company’s financial reporting can be much improved (and it already is better), and balance sheet concerns can and must be cleared up (such as long-term insurance liabilities and pension funding overhangs).

Finally, it is true that Mr. Flannery’s delivery is less than inspiring.  But he does have a good management track record, and seems determined to improve efficiency and how capital and cash flows are deployed.  Since these are the immediate priorities, and since he doesn’t have excess funds to do M&As, that should do for the next 12 to 18 months.

After that, investors will need to understand how GE plans to keep growing its profit margin.  That’s when the “vision thing” becomes important, and it is too soon to tell whether Mr. Flannery is the man to deliver and execute on it.  But I am confident somebody will.

As GE is currently in deep crisis, its p/e multiple is bound to look elevated.  It is more useful to look at market cap-to-revenues, or enterprise value-to-revenues[1].  Should it find its way to emulate such peers as Honeywell in boosting its margins, its stock price would reach $40.  Will it, and if so when, that is the question.

I for one believe that Mr. Flannery, or failing him a successor, will turn GE around over the next three to five years.  At a market cap/revenues multiple of 1.25 today it looks cheap.  Honeywell is at 2.8.

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[1]  Considering only the industrial segments net debt.

General Electric, the last decade and the future

GE has been in the news lately, as analysts have pounded on its poor performance and investors have bailed out in trove.  It is a sad state of affairs for one of America’s great industrial companies.

How did it get to this, and how can it regain its footing?  Looking back with the benefit of hindsight can helps spotting what went wrong.

GE in 2006

So we went back to 2006, a year before US financial markets collapsed, and then compared that year’s results with those of 2016.  Two differences jump out:

1.     Financial services were the “special sauce” which boosted the company results, but at a cost that management didn’t seem to realize, and

2.     Financial reporting was clearer, and the books more intelligible, a decade ago.

In 2006, GE reported its results along 6 segments: Infrastructure (Aviation, Energy, Oil & Gas, Transportation), Commercial Finance (Wholesale Commercial and Real Estate Finance), GE Money (Consumer Finance), Healthcare, NBC Universal (Media) and Industrial (Appliances, Lighting, Plastics, Factory Systems).  Some of the manufacturing segments also reported related financial services income. 

This is how the business GE looked like:

Segment	Revenue (in $bn)	Profit (in $bn)	Profit Margin
Infrastructure	41.6	7.2	17.3%
Healthcare	16.5	3.1	18.8%
NBC Universal	16.2	2.9	17.9%
Industrial	33.5	2.7	8.1%
Financial	51.4	10.3	20%
Total pre corporate & elimin.	159.2	26.2	16.5%
Total post adjustments & taxes	164.3	20.8	12.7%

In all[1], Financial, which reported mostly as GECS (General Electric Capital Services) contributed over 39% of the GE’s operating profits before corporate and adjustments.

But this profit boost from Financial came with outsized risks.  At 2006 year-end, total GECS borrowings amounted to $426 billion, 98% over group total, 40% of which short-term in nature; $100 billion were in the form of commercial paper with an average maturity of 48 days!  And borrowings were growing at a fast clip: almost 18% over 2005.

Borrowings	GE (in $bn)	Financial (in $bn)	Eliminations	GE consol.
Short-term	2.2	173.3	(3.4)	172.1
Long-term	9.1	253	(1.2)	261

So GECS profits were earned on the back of $426 billion in borrowings which levered an equity base of $54 billion[2].  Put in another way, GE allocated 50% of its group equity to financial businesses which in turn piled $426 billion of debt to earn 39% of its profits.

GE consolidated cash flows were $24.6 billion, including a cash dividend of $9.8 billion by GECS.

GE in 2016

Fast forward to 2016.  The financial reporting has become somewhat opaque.  In the annual report, the Performance Summary’s plain English of 2006 has been replaced with tables in which all the items are heavily annotated and presented on a non-GAAP basis. The business segments have been reshuffled again.  

After rearranging the 2016 activity segments to make them more comparable to the 2006 data, we have the following:

Segment	Revenue (in $bn)	Profit (in $bn)	Profit margin
New Infrastructure	79.7	14.2	17.8%
Healthcare	18.3	3.2	17.3%
New Industrial	15.1	0.3	2%
GECS	10.9	(1.2)	(11.5%)
Total pre corporate & elimin.	124	16.3	13.1%
Total post adjustments & taxes	123.7	9.1	7.4%

More negative adjustments were brought up to corporate than before.  In addition, from 2102 to 2016, only one segment showed major profit growth (Aviation, +63.2%), one showed slow growth (Power, + 14%), two were essentially flat (Transportation[3] and Healthcare), while the rest (Oil & Gas, Renewable Energy, Energy Connections & Lighting) were down.  While Power still managed a good 18.6% profit margin, over-optimism would catch up with management in the third quarter of 2017 when it shrunk to 7%.

The most striking change from a decade ago is the plunge in GECS’ operating cash flows[4] to minus $7.9 billion from $9.5 billion in 2015 and $18 billion in 2014. The following table illustrates the shrinking of the financial segment and its poor performance. 

	2006 (in $bn)	2016 (in $bn)
Financial revenues	51.4	10.7
Financial profits	10.3	(1.2)
Financial borrowings	420	117.3

At the consolidated level, GE cash flows dropped from $16 billion in 2014 to $11.9 billion in 2015 and $6.1 billion in 2016.  One should also note that pension underfunding rose from $6.5 billion in 2006 to well over $30 billion in 2016. 

By the third quarter of 2017, the overall results had deteriorated further, with non-GAAP cash flows falling to $1.6 billion year-to-date, full year earnings-per-share forecast down to around $1.05 vs. $1.6 six months earlier, and cash-flows expected to reach about $7 billion.

In sum, GE’s troubles are threefold:

1.     A failed bet on financial services to “easily” boost growth and profits which backfired badly,

2.     A culture which seems to have gone astray, with such empty concepts as the GE Store and convoluted financial reporting, and

3.     A breakdown in basic management which resulted in bloat and sub-par performance.

I believe that, with time, the new CEO can fix #2 and #3.  #3 won’t be easy as it will likely result in a smaller GE, something corporate managements and boards have a hard time accepting.

The real issue, point #1, is whether GE can grow and improve its returns via a better mix of industrial activities rather than via financial levering.  As great a manager as Jack Welch thought back in the 1990s that finance and its inherent leverage was the easier way to go.

Alternative growth strategies

For inspiration, one could look at successful GE peers, such as United Technologies, Honeywell and Emerson Electric, and how they managed to outperform GE.

While GE stock price is flat for the last 5 years, EMR is up 38%, UTX is up 53% and HON is up 139%.

Honeywell is 1/3 the size of GE in terms of sales.  Strategy-wise, it differs from GE in that it targeted large niches of higher tech, high margin differentiated products alongside more main stream commercial ones.  Originally a heating technology firm, HON got into precision engineering (clocks) in 1927.  From then on, it expanded into thermostats, aeronautics (autopilot in 1942), and also automation controls and fire detection.  In 1986 it acquired Sperry, thus increasing its aeronautics footprint.  In 1986 HON was acquired by AlliedSignal, a conglomerate involved in aerospace, automotive, oil and gas and chemicals.  By 1999, AlliedSignal had spun off most of its non-aerospace and automotive businesses and adopted the Honeywell name.  Honeywell kept acquiring new companies, focusing on its key segments of Aerospace, Heating/Fire/Safety systems and Performance Materials.

In 3Q17, the profit margin of its 4 segments varied between 15% and 23%.  3Q17 net earnings were 12.9% of sales.  Free cash flow forecast for 2017 was $4.6-$4.7 billion or about 11% of sales.

Honeywell runs a focused portfolio of critical equipments and services.  It is dominant in such areas as business jet engines, cockpit automation and flight systems (where it forms a near duopoly with Rockwell Collins), HVAC/Fire/Security Controls.  It does best in high technology, critical, non-standardized products and services.  Not surprisingly, it is comparatively less profitable in price sensitive, standardized sectors such as HVAC controls.

United Technologies is ½ the size of GE by revenues and another major industrial company.  It is focused on aerospace, HVAC/Fire/Security systems, and Elevators/Escalators (Otis).  Its brands, such as Carrier, Otis, Pratt & Whitney, Goodrich, Hamilton Sunstrand are known worldwide.  UTX is another large conglomerate which diversified away from the military business into commercial ventures such as Otis in 1976 and Carrier in 1979.  Its latest move was the proposed acquisition of Rockwell Collins, to further beef up its Aerospace Systems division.  Of the three companies here, it is the closest to GE in size and approach.

For 3Q17, its segment profits were around 17%, except for Pratt & Whitney at 6% which faces stiff competition from GE and the GE/Safran joint venture. Net earnings were 8.9% of revenues. The free cash flow forecast for 2017 is $3-$3.5 billion, before a pension contribution of $2+ billion, or 5-6% of sales.

Emerson Electric is another diversified manufacturing company.  It is 1/8 the size of GE by revenue, 1/5 by market value.  Originally established in 1890 to manufacture electric motors, EMR expanded to produce equipment powered by small electric motors.  Today, the company operates in a very wide variety of niches which are regrouped into two segments: Automation, Commercial & Residential.  Such niches include valves, actuators, regulators, flow measurement, control and safety systems, firestops, switches, precision welding, HVAC, professional tools, etc.

3Q17 net earnings were 10.2% of sales.  Over the last couple of years, EMR has suffered from the reduced pace of activity in the oil and gas sector.  For the full year, EMR projects revenue growth of 5% (for continuing operations), operating cash flows of over $2.5 billion (or over 17% of sales) and a 70 bps improvement in earnings before interest and taxes to 17.9%; this should translate into an 11-12% net profit margin.

Preliminary conclusions

The comparison between these four companies is interesting in several regards. 

While all four are industrial conglomerates, the only one which went deep into financial services is GE.  In that sense, the other three are proof that a conglomerate can grow and prosper without leveraging its balance sheet as GE did.

These three companies followed different development paths.

UTX went into aviation as well as a number of large, relatively standardized equipment and services such as elevators, HVAC, etc. which enjoy high brand recognition.  It sports a better valuation than GE, but it is not fundamentally different.  It is also the largest.

HON is also active in a variety of sectors, but it has focused more than the others on large, high tech/high value added quasi niches whose products are often integrated into a broader system, have little standardization and are of critical importance.  Generally, for these reasons, price competition is not as acute as it is for commercial jet engines or even healthcare.  Size-wise, it is smaller than UTX but bigger than EMR.

EMR is a smaller version of HON in that it also focuses smaller but more numerous niches which share some technological commonality.  You could say that it had found the sweet spot, although its Oil & Gas related segment has had a tough ride lately.

Conclusion

Given GE’s crisis situation, a comparison of price-earning ratios is meaningless in trying to explore GE’s revaluation potential.  A ratio of market capitalization to revenues is more revealing.  To that end, we compared 2016 revenues[5] with today’s market capitalization.

Company	Revenues (R)	Market Cap. (M)	M/R
GE	$123.7 bn	$186.1 bn	1.50
UTX	$57.2 bn	$95 bn	1.66
HON	$39.3 bn	$111.2 bn	2.83
EMR	$17.3 bn	$42.6 bn	2.46

Setting aside EMR which is much smaller, we could argue that GE, once it upgrades its culture and management practices AND finds an appropriate growth strategy, could earn a value to revenue ratio anywhere between UTX and HON.  Matching UTX is mostly a matter of better management; the HON model requires greater strategic innovation.

This exercise is obviously very rough, but it shows that GE’s stock could eventually rise to the $24-$40 range. 

To succeed, this strategic refocus will most likely require GE to shrink and shed those segments which can’t accommodate high margins or are too capital intensive.  Already, GE is rumored to explore shedding its locomotive segment.  Its Oil & Gas business is cyclical by nature, has little bargaining power when dealing with oil supermajors and national oil companies; it should probably go as well.  Finally, GE will have to deal with such headaches as its unfunded pension and contingent liabilities in GECS; these could well cost it tens of billions of dollars.

There is of course no guarantee of success.  But GE starts from dominant positions in Power and Aviation.  These represent 50% of its non financial revenues.  Its core GECS business is sound and should be retained.  Management seems determined and so far sound in its approach.  More importantly, as daunting as the task looks, it can be done: GE can look to some of its peers for inspiration.

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[1]  Earlier in the year, GE had spun off its insurance business, Genworth.

[2]   GECS net worth only, the GE consolidated net worth at 12/06 was $112 billion.

[3]  Albeit on shrinking revenues.

[4]  From continuing and discontinued operations.

[5]  For EMR we considered its FY 2016 which ended in September 2016.

Far East Showdown

Movie buffs surely remember this scene from Shane: Joe Wilson, the hired gun played by a malevolent Jack Palance, goads pint-sized but big mouth Stonewall Torrey into a gun-fight.  Knowing he has little chance to win yet unwilling to back down, Torrey bravely goes for his gun; Wilson easily outdraws him, cracks a smile and then shoots him down.

For some reason, as Kim Jong-Un and Trump have escalated their war of words, I haven’t been able to get this scene out of my mind, as I see a number of parallels.

For one, the US are much more powerful than North Korea, yet until recently had let the latter have a free hand on its nuclear armament, and a succession of Kims have threatened to incinerate Seoul and its population every time the US tried to force its denuclearization.

The US now seem determined to force the issue, and Kim Jong-Un, like Torrey, is loathe to back down and increasingly desperate as he contemplates the situation.  Like Wilson, Trump looks like he enjoys pushing and pushing Kim, sardonically smiling at his opponent’s mounting worries.

Finally, like Wilson, the US don’t really want Kim Jong-Un to (politically) survive the showdown, as they and Kim know that his reign of terror can’t survive a massive and public backing-down.

Of course, Shane is a movie and one can’t push the comparison with a real crisis too far.  But as it masterfully depicts human aspirations and quarrels, high and low, it can serve as an effective allegory of a real conflict.  In particular, I believe that both the US and NK realize that, for the current crisis to result in an effective agreement (including the denuclearization of the Korean peninsula), Kim Jong-Un is unlikely to be a party to it.

I expect that China must realize that as well.  In the end, it will have to decide between (1) letting NK keep its nukes and ICBMs and risking US military action, (2) Japan rearming and nuclear weapons returning to South Korea if the US don’t take military action, and (3) helping manage a government change in North Korea and the denuclearization of the peninsula.  None of these outcomes are what China would like. 

The 19^th Congress of its communist party is less than a month away.  Assuming President Xi achieves what he wants there, will he feel strong enough to then try and solve what is, under any circumstance, a dangerous situation?  Will the US provide him with the necessary assurances to jointly design and implement a lasting solution to the NK crisis?  We should know in a couple of months.  Until then, the pressure on Kim will keep rising.

The Mae West Principle and the renewal of Brazil

If you have read this blog for a while, you will remember my deeply held belief that Mae West holds the future of Brazil in her hands, so to speak.

Mae West, was a leading Hollywood “femme fatale” in the 1930s and 40s.  She was also renowned for her double entendres and quick wit.  My favorite remark of hers is: “I can resist everything except temptation.” 

Had the Royal Swedish Academy of Sciences been more perceptive, it would have awarded her its Nobel Prize for Economics in 1980, before she died, rather than to Lawrence Klein, the father of econometrics.  Seriously, I believe that the above Mae West Axiom has greater potential for economic growth in Brazil than any combination of Klein’s models.

Back in 2015, I wrote a post in which I argued that the massive corruption scandal at Petrobras had been facilitated by its status as government-controlled national champion, leaving politicians too close to the levers of power and to the cash coffers.  Similar instances of corruption were uncovered at Eletrobras, the giant electric energy holding, also controlled by the government. 

The Mae West Axiom, if it had been followed, would have offered a simple solution: privatize Petrobras and transfer control out of government hands, and you will greatly reduce instances of corruption.  Indeed, Vale (the iron ore giant), the telecoms and the steel companies the control of which had been sold to private investors, didn’t suffer the same corruption abuses.

Which brings us to the present.  Today, the Public Prosecutor’s Office charged Aldemir Bendine with corruption for facilitating the business of Odebrecht with Petrobras in return for personal payments.  What is so damning, and instructive, is that Mr. Bendine was appointed CEO of Petrobras in 2015 to clean its finances and practices, after the huge Lava Jato scandal had come to light!

I must confess that I totally misjudged the man at the time, perhaps because we both are fans of the rock band Queen (?).  If one needs any further proof of the lack of accountability at government-controlled behemoths, I don’t know what beats that.

Also today, the stock price of Eletrobras shot up a massive 32% to 49%[1].  What triggered such unheard movement?  The news that the Ministry of Finance intends to privatize the company.  Since its shares are already publicly traded, this means selling shareholder control to private interests with the state retaining the equivalent of a golden share to veto certain key decisions. 

A greater no-confidence vote in government control, I have never seen!

When Petrobras did its IPO, popular and political resistance made it impossible to actually privatize the company.  The later discovery of massive offshore deposits actually caused a quasi renationalization, and brought Petrobras close to bankruptcy.  It remains to be seen if the current unpopular government will be able to also free Petrobras; one would hope that the Brazilian people would be fed up with the scandals and pick the obvious way out, but “black gold” elicits much stronger emotions than do kilowatts.

Which brings us back to Mae West:” between two evils, I always pick the one I never tried before.”  Brazil has long had government control over its national champions, Petrobras and Eletrobras.  This did provide its politicians with sinecures and juicy consulting contracts for them and their friends; but it also brought prison sentences, personal embarrassment and destabilized the country.  How about trying something new, clearly unpalatable, but safer?  Maybe.

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[1]  Depending whether one considers the non-voting or the voting shares.

North Korea, no good options but no middle ground outcomes either

It is decision time for North Korea, China, South Korea and the US.  As North Korea has reportedly mastered ICBM technology and possibly nuclear warhead miniaturization, the world is at a crossroad.  There seems to be little room left to safely kick the can down the road.

Each of the above actors will have to make momentous decisions in the weeks and months to come.  None will be easy or popular.  For better or for worse, both payoffs and penalties will be outsized.

The quasi-consensus advice, from here at home and abroad, is for the US to “engage in meaningful negotiations” with North Korea.  In my view, it would be premature or wrong.

The US has tried to dissuade North Korea from building nuclear weapons for a quarter century, to no avail.  Such effort was undertaken by both Democratic (Clinton, Obama) and Republican (Bush) presidents, variously viewed as thoughtful, dovish, impulsive, hawkish or pragmatic.  It made no difference.  It is thus logical to conclude that North Korea doesn’t want to negotiate away its nuclear militarization.

North Korea is governed by a repressive elite which presides over an impoverished country which treats its people very badly.  Even its ambassadors, privileged as they are, defect when given the chance.  There is little doubt that this elite views its nuclear achievements and armament as the way to repulse would-be attackers and stay in power.  Could the US guard them against such threats?

The answer is simply NO because the greatest threats are from within North Korea.  Neither China, nor Japan, nor the US would want to conquer the DPRK[1], a country devoid of natural resources and populated by 25 million poor people.  South Korea may wish for a reunification, as West Germany did, but it would make no sense to do it militarily; even a peaceful reunification would be difficult: the cost of integrating one North Korean would have to be borne by two South Koreans; in the German case, the ratio was a better, yet still taxing, 1:4.  The only real threat to Kim’s regime is from within.  The US couldn’t and wouldn’t protect the Shah of Iran or Mubarak in Egypt, where it had greater strategic interests; this is truer still for Kim.

China has enjoyed having North Korea as a buffer along its border.  Their relations could never have been described as cordial, but both countries found some mutual benefits.  As China seems to take a more authoritarian tack, its tolerance for the DPRK may endure.  Nevertheless, a nuclear North Korea brings big short and long-term challenges: it could force the US to strike and destabilize a neighbor with 25 million people to eliminate an existential threat;  longer term, Japan, and possibly South Korea, may conclude that the US won’t risk a nuclear war to fulfill its military obligations and decide to build their own nuclear arsenals.

For the rest of the world, a nuclear North Korea brings obvious risks, the biggest one being proliferation.  There is evidence that North Korea provided technical assistance to both Iran and Syria in the nuclear arena.  A pariah nation with nukes would logically increase trading on its weapon expertise, and such activity may not be limited to nation states.  Finally, it would encourage countries close to the threshold of nuclear power, such as Iran, and others to push the envelope.

In my view, the two most likely outcomes are as follows:

1)   Covertly prodded/encouraged from abroad, local factions unseat Kim with the understanding that they will dismantle their nuclear weapons.  Joint inspections by the International Atomic Energy Agency, China and the US will insure compliance.  China and the US agree to a multi-year, multi billion dollar economic assistance program.  The US agrees not to move its South Korean military bases or units further North.  The US recognizes North Korea.

2)   The US strikes North Korean ballistic installations and nuclear assets.  It also effectively disables its communication networks and electricity grid.  It warns that any North Korean attack on the South will be met by an overwhelming conventional response.  The US also offers to initiate talks about nuclear disarmament with legitimate North Korean counterparts, effectively forcing Kim to step down.

There is a third possibility, although I see it as less likely: as the world gets increasingly concerned about the fallouts of a military confrontation in the Korean peninsula, Europe, China and the US step up their sanctions to the point where they really hurt everybody in North Korea and endanger the stability of the regime.  At that point, the DPRK government turns to (personal) survival mode and agrees to enter into negotiations.

In conclusion, parties negotiate when it is the most palatable option they have.  A very good example of this is the recently signed Colombian peace accord after the FARC started to suffer heavy tactical and strategic losses.  For decades, the US has been willing to negotiate denuclearization while North Korea hasn’t.  Recently, the commercial and military pressure on North Korea has increased notably, but time is running out.  This is why I believe that the above two scenarios are the most likely.

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[1]  The Democratic People’s Republic of Korea.

Does coal have a future?

CNBC viewers may have been surprised to hear NEC Director Gary Cohn say that “at some point in the cycle, coal will be competitive again”.  Really?  After all, such technological innovations as fracking and horizontal drilling caused US oil and gas production to almost double in just one decade, and natural gas to become the fuel of choice for power plants.

Cheap prices for natgas and pollution issues for coal are the big market drivers.  But both could see changes if not outright reversals.

In the US, natural gas prices broadly averaged between $8.8-$4 per Million Btu in the 2000s but dropped to $4.4-$2.7 over the 2010-2015 period.  After touching a low of $1.49 in March 2016, they rebounded above $3 this year.  Logically, such rebound in price benefitted coal: First quarter 2017 electricity generation from coal grew 5% year-on-year.

Pollution is the other key factor.  According to the Energy Administration Agency, in 2016 coal-burning power plants worldwide released around 2 lbs of CO2 per Kwh.  They also released other undesirable gases, metals and particules.  Natgas-fired plants only released 0.8-0.9 lb/Kwh[1].  As the world pushes for lower emissions and countries may tax CO2 at $30-$50/t, coal is handicapped.

But technology is beginning to change that.  High Efficiency-Low Emissions coal-fired plants are already reaching efficiency levels of 45% vs. 33% for conventional ones, and 50% is a realistic goal.  By comparison, state-of-the-art natgas power plants exceed 60%.

Today, the most advanced Japanese combined cycle plants which feed pulverized coal and burn it at very high temperatures achieve emission levels of around 1.5 lbs/Kwh.  By the early 2020s, 1.2-1.3 lbs/Kwh will likely be achieved.  Further out, fitting these plants with Carbon Capture and Storage (CCS) technology could actually transform coal into a clean fuel with CO2 emissions in the 0.2-0.25 lb/Kwh range.  Of course, such technologies will need to be cost effective, and developing them will take time (10 to 15 years).

But coal is the most abundant energy source on earth, and countries such as China, India and South Africa which don’t have much oil, do have a lot of coal.  It is easy to store and to transport.  Coal-fired plants provide cheap energy around the clock, day and night, rain or shine.  From an economic and strategic point of view, it is therefore a very valuable commodity. 

Its pollution characteristics and the great technological advances which benefitted natural gas have pushed it aside (at least in developed countries), but technology and the need to produce more electricity will likely bring it back.

A contrarian investor with a long term view should keep an eye on it.  The interested reader may take the demise of coal with a grain of salt.  Dirty coal is slowly dying, but clean coal will likely rise from its ashes.

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[1]  Depending whether one uses data from developed or emerging economies.