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Will Arch Coal (ACI) Beat Earnings?

Zacks Equity Research

Arch Coal Inc. (ACI) will release its second quarter 2013 financial results before the market bell on Jul 30, 2013. In the prior quarter, this coal operator reported a negative earnings surprise of 6.25%. Arch Coal at the moment has a Zacks Rank #3 (Hold). Let’s see how things are shaping up at the company prior to this announcement.

Factors to Consider This Quarter

Arch Coal’s aggressive cost containment efforts and capital expenditure restraints will be the key highlight in the second quarter. Its focus on low-cost operations in the Powder River Basin and Appalachia will continue to lend constancy to margins. In addition, rising natural gas prices contributing to increased coal demand will add to Arch Coal’s profitability.

However, the met coal oversupply in Asia compounded by the current sluggish demand conditions in China would hurt Arch Coal’s coal exports.

The company will nevertheless gain from favorable metallurgical coal fundamentals from the second half of 2013 fueled by the estimated 2.9% and 3.2% year-over-year growth in global steel usage in 2013 and 2014, resepctively, as per the World Steel Association.

Earnings Whispers

Our proven model does not conclusively show that Arch Coal is likely to beat earnings this quarter. That is because a stock needs to have both a positive earnings Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here.

Negative Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at -9.38%.

Zacks Rank #3 (Hold): Arch Coal has a Zacks Rank #3 (Hold). This combined with an ESP of -9.38% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some companies indirectly related to the coal industry which are worth considering on the basis of our model. They have the right combination of elements to post an earnings beat this quarter:

Southern Company (SO) has earnings ESP of +1.47% and carries a Zacks Rank #3 (Hold).

Westar Energy (WR) has earnings ESP of +2.22% and carries a Zacks Rank #3 (Hold).

PNM Resources, Inc. (PNM) has earnings ESP of +3.03% and carries a Zacks Rank #3 (Hold).

Read the Full Research Report on ACI

Read the Full Research Report on SO

Read the Full Research Report on WR

Read the Full Research Report on PNM

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