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Earnings Preview: Arch Coal Inc.

Zacks Equity Research

Arch Coal Inc. (ACI) is set to report its fourth-quarter and full-year 2012 results on Feb 5, 2013. Last quarter, the company reported a positive surprise of 233.3%. Let’s see how things are shaping up prior to the announcement.

Factors to Consider This Quarter

The year 2012 was dull for the coal industry as the coal companies continue to face challenges from the rising utilization of alternate energy for electricity generation, higher competition from natural gas producers, production curtailment in the manufacturing sector and compliance with rising government rules, which increased the costs of operations. Like other coal producers, Arch Coal is experiencing a similar situation.

In addition, we are skeptical about the weak metallurgical coal scenario. Arch Coal could face challenges in terms of lower pricing due to weak demand from the Asian and European market, as it experienced during the third quarter of 2012.

However, we are optimistic about Arch Coal’s continuous efforts toward cost control as well as the chances of improvement of thermal coal demand in the U.S. domestic market, which may boost margins.

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 ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Negative Zacks ESP:  This is because the Most Accurate estimate stands at a loss of 19 cents, while the Zacks Consensus Estimate is pegged at a loss of 14 cents. This comes to a difference of -35.71%.

Zacks Rank #3 (Hold): Arch Coal Inc. with Zacks Rank #3 (Hold), enhances the possibility of an earnings surprise. However, the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult. We also caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is experiencing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies from the sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

TECO Energy, Inc. (TE) has Earnings ESP of +14.29% and Zacks Rank #3 (Hold)

Otter Tail Corporation (OTTR) has Earnings ESP of +6.67% and Zacks Rank #3 (Hold)

PPL Corporation (PPL) has Earnings ESP of + 6.52% and Zacks Rank #3 (Hold)

Read the Full Research Report on ACI

Read the Full Research Report on TE

Read the Full Research Report on PPL

Read the Full Research Report on OTTR

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