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Arch Coal Earnings Likely to Lag

Zacks Equity Research

Arch Coal Inc. (ACI) will release its first quarter 2013 financial results before the market opens on Apr 23, 2013. In the prior quarter, this coal operator reported a negative earnings surprise of 200.0%. Arch Coal currently has a Zacks Rank #3 (Hold). Let’s see how things are shaping up at Arch Coal prior to this announcement.

Factors to Consider This Quarter

The soft performance of the coal industry in 2012 is expected to linger in the first quarter of 2013 and demand for coal is likely to pick up in the subsequent quarters with the expected increase in natural gas prices.

This company generated 36% of its coal revenues from 10 large customers among which 3 accounted for 16% of total coal revenue in 2012. Arch Coal is presently negotiating sales agreement with some of these customers. If the company fails to enter into a favorable contract it can weigh heavily on its profitability.

Slackness in thermal coal demand had prompted Arch Coal to shut down four mines and temporarily idle a mine in 2012.  The global thermal coal market is expected to recover in 2013, driven by demand primarily from Asian countries. This can benefit Arch Coal as thermal coal accounted for the majority of its coal sales.

However, the company will have to face stiff competition from domestic as well as international thermal coal producers. In addition, Arch Coal’s operations may be hindered by limited port capacity for shipment to international customers. These factors could impact the volume of coal sales.
Earnings Whispers

Accordingly, 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 (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:  This is because the Most Accurate estimate stands at a  loss of 33 cents while the Zacks Consensus Estimate has a narrower loss of 32 cents, resulting in -3.13% ESP.

Zacks Rank #3 (Hold): Arch Coal’s Zacks Rank #3 with a negative Zacks ESP complicates the forecasting power making surprise prediction difficult.

Arch Coal registered a negative earnings surprise in the last quarter. We caution investors against the stock going into the earnings announcement.

Other Stocks to Consider

Here are some other companies tied to the coal industry worth considering on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

CONSOL Energy Inc. (CNX) has earnings ESP of +15.79% and carries a Zacks Rank #3 (Hold).

Alpha Natural Resources Inc. (ANR) has earnings ESP of +3.39% and carries a Zacks Rank #3 (Hold).

American Electric Power Company Inc. (AEP) has earnings ESP of +2.74% and carries a Zacks Rank #3 (Hold).

Read the Full Research Report on AEP

Read the Full Research Report on CNX

Read the Full Research Report on ACI

Read the Full Research Report on ANR

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