Don't Ignore Coal at Current Lows

A couple of events in the last two weeks have me thinking about coal.

Yesterday Arch Coal (ACI) said third-quarter net income more than tripled to $97.8 million, or 68 cents a share, from $27.3 million, or 19 cents a share in the year-ago period. Revenue increased to $770 million from $599 million. (Call Transcript)

Wall Street analysts expected the St. Louis coal producer to earn 61 cents a share on revenue of $772 million, according to a survey by FactSet Research. Arch's trading and optimization function reported an $18.4 million loss in the third quarter, offset by a $26.9 million income tax benefit. "Despite a near-term softening of coal demand, we remain on pace to deliver our best financial performance in company history," Arch Coal said.

Last week Peabody (BTU) announced a $1B buyback that at current levels amounts to 12% of its market cap. With the Arch news, it would seem the fundamentals of the business in no way relate to the current stock price action would indicate.

Finally, it was reported last week that India was in the US shopping for coal deposits.

While coal demand may be softening, it has not evaporated as the share price of
both would suggest (down over 60%). When we have other nations looking for coal in the United States, we can only assume they need much more than they have. That is good for global producers like BTU.

BTU, which earned $1.37 in 2007, has earned $2.37 a share through the first nine months of 2008 and will add 12% to that down the road just through the share repurchases. Peabody trades at 9 times very conservative estimates for the remainder of 2008 and just 6 times the low end estimates for 2009 (the estimates were done before the share repurchase plan was announced).

Coal is one of those things we cannot live without. More than that, the rest of the developing world wants it really badly. It is a nice business to be in, especially when the stocks are priced at these levels.

Disclosure: None

Comments

[captainccs:]

>>>Yesterday Arch Coal (ACI) said third-quarter net income more than tripled to $97.8 million, or 68 cents a share, from $27.3 million, or 19 cents a share in the year-ago period. Revenue increased to $770 million from $599 million.

Yes, but that was with oil was at $140 a barrel. Future earnings reports will come with oil at $60 a barrel. Coal revenue will be depressed by lower oil prices and when the negative "earnings surprises" come in, coal shares will get hammered.

2008 Oct 28 09:41 AM

[Daryan:]

They have already been hammerred and are pricing in coal at least 75% below current spot rates. Other than turning coal into Oil, what else do they have to do with one another fundamentally? Disclosure: none

2008 Oct 28 09:59 AM

[Mark Anthony:]

US coal is no longer bullish but bearish now. Read why:
stockology.blogspot.co...

2008 Oct 28 10:07 AM

[deee:]

Indiana is now going to have the first coal gasification plant in the country. Duke is involved. I saw over 300 new aluminium coal cars go by at a railroad track. All were brand new and empty. They were headed out west through the Chicago area. These will be filledt othe brim and move on. Coal is moving

2008 Oct 28 10:36 AM

[captainccs:]

Daryan:

>>>Other than turning coal into Oil, what else do they have to do with one another fundamentally?

They are all BTUs under the skin. :))

2008 Oct 28 03:39 PM

[wallyjm:]

the germans in ww2 fueled much of their war fuel needs by converting coal into gasoline and diesel and some oil from ploesti oil fields in romania. wecan do the same here and stop importing oil from the arabs. and t. boone wants to fuel our cars and trucks with the large amounts of natural gas we have here. the city bus's in palm springs ca have been running on such for years.

2008 Oct 28 04:47 PM

[svosavvy:]

good observation dee, they are probably headed to the powder river basin (prb) in wyoming. There is international interest in the prb which is the saudi arabia of coal. PRB spot prices are cheaper than appalachia and everyone is looking for cheaper ways to transport it out to the west and east coasts. The big problem with the prb is it probably costs more to haul a ton than to buy a ton of coal. Canada pacific's buying interest in the DM&E RR would give them a main line from prb to vancouver to ship to china. ACI owns black thunder the highest yielding mine in the best stake in the world. Long aci, buy it now while it's cheap and the morons that say obama will shut down coal will have to get used to living in the dark.

2008 Oct 29 11:51 AM

[svosavvy:]

to mark anthony yes I agree short term bearish on coal, but, that indicates buying time to me as is the point of this exercise buy low etc. Seems drys would be a bear too until things pickup. I bet after 1Q09 things will look a lot different from the international viewpoint. Indonesia seems the only real competitor for the grade of coal the us produces. Weaker diluted dollar will get us commodities moving again.

2008 Oct 29 12:07 PM