Is This Coal Company Ready for a Rebound?

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shareholders of Arch Coal (NYSE: ACI) have seen the price of their stock drop about 50% over this year. However, the price of natural gas is rising. Together with the prospect of exporting coal to international markets, the month of December 2012 provided welcome relief. Arch Coal’s share price started bouncing back from historical lows.

On December 14, the coal complex got a big boost. The chief executive officer of the country’s largest coal producer, Peabody Coal, came out with positive forward expectations. The CEO claims higher natural gas prices are causing a switch back to coal from natural gas. The company sees increased exports to more favorable international markets and improving conditions next year.

Future Prospects

Arch Coal is one of the top five global coal producers. The company claims to be the one of the most diversified U.S.-based coal companies due to the location of their mining operations.  As such, Arch Coal is likely will benefit from increased coal demand in the US.  The company is also following the path of other coal producers and planning increased international exports.

However, a December 11 report from the US Energy Information Administration does not paint a positive short-term outlook. The agency is forecasting coal consumption in 2012 to be the lowest since 1992.  However, they also predict rising natural gas prices will lead to a minor increase in coal demand for 2013.

For international exports, the EIA sees the record exports of 2012 declining in 2013. The agency bases this forecast on the expectation of continuing weak conditions in Europe and lower coal prices for exports.

Arch Coal is a major supplier of metallurgical coal used in steel making. The company’s best future prospects come from pickup in global demand for steel. The economic slowdown in the Chinese and Brazilian economies has hurt the steel complex. With gradual economic improvements in China and the newly planned infrastructure projects, steel production should recover. 

Coal is an abundant resource and Arch is a low cost producer. Although future demand for coal may be uncertain, technological innovation could change all that.  Underground coal gasification is a process that could propel demand due to cleaner burning.

Arch Coal vs. the Rest

The following table looks at some key performance metrics for Arch Coal and two competitors, James River Coal Company (NASDAQ: JRCC) and Consol Energy (NYSE: CNX).

<table> <tbody> <tr> <td> <p><strong>Indicators</strong></p> </td> <td> <p><strong>Arch Coal </strong></p> </td> <td> <p><strong>Consol Energy </strong></p> </td> <td> <p><strong>James River Coal </strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$1.63 bil</p> </td> <td> <p>$7.81 bil</p> </td> <td> <p>$127.77 mil</p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong><strong> (</strong><strong>2014)</strong></p> </td> <td> <p>--</p> </td> <td> <p>27.34</p> </td> <td> <p>--</p> </td> </tr> <tr> <td> <p><strong>P/S Ratio</strong></p> </td> <td> <p>0.37</p> </td> <td> <p>1.40</p> </td> <td> <p>0.10</p> </td> </tr> <tr> <td> <p><strong>P/B Ratio</strong></p> </td> <td> <p>0.52</p> </td> <td> <p>2.06</p> </td> <td> <p>0.37</p> </td> </tr> <tr> <td> <p><strong>5 Year Earnings Growth Forecast</strong></p> </td> <td> <p>1.18%</p> </td> <td> <p>27%</p> </td> <td> <p>13.4%</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p>1.56%</p> </td> <td> <p>1.46%</p> </td> <td> <p>--</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>1.45</p> </td> <td> <p>0.84</p> </td> <td> <p>1.61</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>-9.48</p> </td> <td> <p>12.02</p> </td> <td> <p>22.82</p> </td> </tr> </tbody> </table>

(Data from Finviz and is current as of December 19)

Consol Energy is unique here. The company produces natural gas as well as thermal and metallurgical coal. The company’s share price has dropped only about 7% year over year. In contrast, Arch and James River have lost almost 50% of their share price. Consol’s natural gas reserves may explain why. 

The P/S and P/B ratios for Arch and James River are possible indicators of bargain-priced value stocks. However, book value depends on the accuracy of valuing the company’s assets. Coal reserves valued at current prices may not always accurately reflect future market conditions. Given Arch’s poor Return on Equity and low 5-year earnings growth forecast, investing in Arch appears high risk at best. 

Foolish Summary

Coal as an energy source is not going away anytime soon. However, its position as the cheapest energy source is now questionable. Analyst opinion is mixed on the stock. In addition, increasing concerns over climate change could increase the push towards cleaner alternatives. The early December rally in coal stocks may be drawing to a close. While coal stocks look like cheap deals, I do not think a full rebound is likely to happen in near future. 

ecofinstat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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