Unveiling Arch Resources (ARCH)'s Value: Is It Really Priced Right? An In-Depth Exploration
Arch Resources Inc (NYSE:ARCH) has been on a roll, with a daily gain of 5.04% and a three-month gain of 56.07%. The company's Earnings Per Share (EPS) stands at 45.92. But the question arises, is the stock significantly overvalued? This article delves into the valuation analysis of Arch Resources, providing an insightful perspective on its intrinsic value.
Company Introduction
Arch Resources Inc is a renowned producer of metallurgical and coking coal, primarily selling its products to power plants, steel mills, and industrial facilities. With a majority of its revenue derived from Asia, the company has established a strong foothold in the Metallurgical (MET) segment. As of September 27, 2023, the stock price of Arch Resources stands at $169.53, significantly higher than its GF Value of $118.17, indicating a potential overvaluation. This article aims to delve deeper into the company's valuation, juxtaposing financial assessment with essential company details.
Understanding the GF Value
The GF Value is a measure of the intrinsic value of a stock, calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on our analysis, the stock of Arch Resources (NYSE:ARCH) is believed to be significantly overvalued. With a current price of $169.53 per share and a market cap of $3.10 billion, the future return of Arch Resources stock is likely to be much lower than its future business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Arch Resources has a cash-to-debt ratio of 1.73, which is better than 73.94% of 587 companies in the Steel industry. GuruFocus ranks the overall financial strength of Arch Resources at 9 out of 10, which indicates that the financial strength of Arch Resources is strong.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Arch Resources has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $3.40 billion and Earnings Per Share (EPS) of $45.92. Its operating margin is 21.29%, which ranks better than 93.86% of 603 companies in the Steel industry. Overall, the profitability of Arch Resources is ranked 6 out of 10, which indicates fair profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Arch Resources is 10.2%, which ranks worse than 52.99% of 585 companies in the Steel industry. The 3-year average EBITDA growth is 41%, which ranks better than 74.56% of 507 companies in the Steel industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Arch Resources's ROIC was 49.73, while its WACC came in at 6.35.
Conclusion
In conclusion, the stock of Arch Resources (NYSE:ARCH) is believed to be significantly overvalued. The company's financial condition is strong, and its profitability is fair. Its growth ranks better than 74.56% of 507 companies in the Steel industry. To learn more about Arch Resources stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
