Arch Coal, Inc. (ACI) missed both our top and bottom line expectations in the first quarter of 2012, owing to increasing operations costs and lower domestic sales. We expect little abatement in the declining trend in the upcoming quarters.
Possible weakening of coal prices as cheap natural gas comes into play and continued regulatory pressures from various environmental organizations add to our negative outlook. Rising costs of industrial supplies and political as well as economic uncertainties are additional concerns.
Presently, the stock is trading at a discount to the peer group based on 2012 earnings estimates, though the trailing 12-month EV/EBITDA multiple is above the industry average. Our target price is $5.75, based on 1.9x trailing 12-month cash flow.
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