On March 25, we have issued an updated research report on
Arch Coal Inc.
). The U.S. coal major continues to expand its coal reserve and
focus more on cost-containment activities. However, stringent
environmental regulations and over-dependence on limited
customers for revenue generation can challenge the company's
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Arch Coal, a Zacks Rank #3 (Hold) stock, reported adjusted loss
per share in fourth-quarter 2013, which was wider than the Zacks
Consensus Estimate and the prior-year level. Quarterly result was
negatively impacted by a decrease in revenues and higher interest
expenses. The company's fourth-quarter total revenues missed the
Zacks Consensus Estimate. On a year-over-year basis, reported
revenues decreased mainly due to lower sales volumes and a drop
in average sales price per ton.
In 2014, metallurgical (met) coal demand is expected to increase
primarily due to higher steel production. As per a World Steel
Association report, the use of steel will likely increase in
2014, primarily due to higher demand in China, India, Japan and
the Middle East and North African region. We believe Arch Coal's
sufficient met coal reserves along with the commencement of
production from its Leer mine in Tygart Valley will enable the
company to meet increased coal demand.
We appreciate Arch Coal's steady cost-containment initiatives. In
2013, the company's total operating costs and expenses decreased
18.7% year over year, primarily on the back of lower cost of
sales. In addition, Arch Coal is right-sizing its operations,
reducing consumable costs for diesel and explosives, and
curtailing contractor and overtime labor costs. These initiatives
will enable the company to improve its future margins.
However, Arch Coal may face stiff competition from Australia and
Indonesia due to their growing dominance in coal export market.
The coal companies of these countries enjoy lower transportation
cost compared to the U.S. owing to their proximity to the Asian
countries, which can help them to win significant coal contracts
from India and China.
Key Picks from the Sector
Other better-ranked stocks in this sector include
Rhino Resource Partners LP
Westmoreland Coal Company
Oxford Resource Partners, L.P.
). While Rhino Resource Partners carries a Zacks Rank #1(Strong
Buy), Westmoreland Coal Co. and Oxford Resource Partners hold a
Zacks Rank #2 (Buy).