We reaffirm our Neutral recommendation on
Arch Coal Inc.
). The company posted mixed numbers for the third quarter 2012,
as the top line beat the Zacks Consensus Estimate while the
bottom line fell short of it.
The U.S. coal market is expected to be under pressure from the
continued switching to natural gas; however, the seasonal spike
in demand for electricity could improve the company's operations.
Arch Coal's high-quality Leer Mine prospect is expected to be a
major contributor going forward.
The company's strategy to shift its capital spending to core
operations will secure investment options for projects with
potential high returns as well as for modernization initiatives.
Conversely, Arch Coal's operations will be impacted by stringent
regulations from the Environmental Protection Agency ("EPA") that
could potentially result in idling of certain coal plants. The
pressure of increasing compliance costs could also lower
The company plans to strengthen its foothold in the
Asia-Pacific markets and has entered into several deals on PRB
coal with Korea's power generating companies. Although the met
coal market is expected to experience slow growth, we believe
these opportunities will keep the growth momentum for Arch
Nevertheless, unplanned outages or equipment failures and
adverse weather conditions like Hurricane Sandy and heavy snows
could hamper operations and transportation thereby affecting the
For 2012, Arch Coal expects to sell 129-135 million tons of
thermal coal and 7.5 million tons of metallurgical coal. The
company's capital outlay will likely be in the range of
The Zacks Consensus Estimates for the fourth quarter and full
year 2012 currently stand at a loss of 12 cents and 31 cents per
The company's closest peer,
Peabody Energy Corporation
) is also facing the brunt of the tough market conditions.
Reflecting the broad fundamentals, both these companies hold a
short-term Zacks #3 Rank.
The company is a pure coal play and engages in the production
and sale of steam and metallurgical coal from surface and
underground mines located in the United States.
ARCH COAL INC (ACI): Free Stock Analysis
PEABODY ENERGY (BTU): Free Stock Analysis
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