We reiterate our Neutral recommendation on Arch Coal Inc. (ACI). The large-scale coal production company currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Arch Coal reported uninspiring financial results in fourth quarter 2012, with both the top and the bottom line significantly lagging the Zacks Consensus Estimates. Plummeting sales volume plus a rise in operating expenses contributed to the overall underperformance.
However, we believe increased thermal as well as metallurgical coal usage in the emerging economies of India and China would be favorable to the demand for coal and thereby Arch Coal’s profitability. The company’s Western Bituminous and Appalachia plays are expected to act as the key providers of high-quality coal in the near term.
Several low-cost domestic operations of Arch Coal, like the Leer, Skyline and Mount Laurel mines are also likely to fetch substantial returns, going forward. Its sound financial position will help the company overcome domestic coal market challenges. Moreover, Arch Coal’s five-year average dividend yield of 1.80% is well above the industry average, and will encourage investor confidence.
Then again, continued switch in coal-to-natural gas in the U.S., and regulatory pressure could deter growth opportunities. The Zacks Consensus Estimate for the first quarter of 2013 is pegged at a loss of 32 cents per share.
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