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Will Arch Coal (ACI) Miss Earnings Estimates?

Zacks Equity Research

Arch Coal Inc. (ACI) is set to release its third quarter financial results before the market bell on Oct 29, 2013. The prior quarter saw the coal operator making a comeback with a positive earnings surprise of 9.38%. Arch Coal currently retains 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

With coal market challenges still plaguing Arch Coal’s performance, we believe its focus on capital expenditure cuts and cost curtailment will keep margins stable in the quarter. The company’s non-core asset divestiture strategy like the sale of the Canyon Fuel subsidiary has helped to streamline operations.

In addition, Arch Coal’s strategy of steering resources to widen its Powder River Basin coal customer base will continue to fetch good returns.

However, as per the Energy Information Administration, U.S. coal exports declined 7.6% in the first half of 2013 compared to the corresponding period last year. Arch Coal’s shipments will also likely wane given the ongoing weakness in the Asian markets of India, South Korea and Taiwan.

Any near-term improvement in the price of metallurgical coal is not on the cards due to lingering oversupply issues in the global markets.

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 Zacks Earnings ESP (Expected Surprise Prediction) 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 -13.33%.

Zacks Rank #3 (Hold): Arch Coal’s Zacks Rank #3 (Hold) combined with an ESP of -13.33% 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 directly and 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:

Alliant Energy Corp. (LNT) has earnings ESP of +4.55% and carries a Zacks Rank #2 (Buy).

Great Plains Energy Inc. (GXP) has earnings ESP of +3.26% and carries a Zacks Rank #2 (Buy).

James River Coal Company. (JRCC) has earnings ESP of +1.61% and carries a Zacks Rank #3 (Hold).

Read the Full Research Report on ACI
Read the Full Research Report on JRCC
Read the Full Research Report on LNT
Read the Full Research Report on GXP

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