4 Reasons Why Analysts Expect Arch Coal's Stock To Double

| About: Arch Coal (ARCH)

Arch Coal, Inc. (ACI) engages in the exploration, mining, and the sale of coal. This stock has just about been cut in half since November, trading as it was for about $20 per share back then. The stock decline was further exacerbated when the company announced disappointing financial results, which dropped the stock to near 52-week lows.

Since many of the factors pushing down coal stocks might only be temporary, this could be a perfect time to buy coal producers, at bargain prices. Stocks in the coal industry have been declining due to weakening profit margins. The price of coal has been impacted by weak natural gas prices because utilities can easily switch from coal to natural gas to create electricity. Investors are also concerned that China is facing a hard landing and that the country is one of the world's largest markets for coal.

Here are four reasons to consider buying Arch Coal shares, while still well below the 52-week high:

1) Just a couple weeks ago, analysts at investment firm Howard Weil gave Arch Coal shares a market outperform rating and set a $22 price target for the stock. After the punishing slide this stock has seen, investors buying now at around $10.71 could just about double their money. If a $22 price target seems like a stretch right now, keep in mind that Arch Coal shares traded for over $36 in the past 52 weeks.

2) Arch Coal is poised to benefit from an eventual rebound in coal prices. China is a leading consumer of coal and even though some investors remain concerned about a hard economic landing, China is still seeing solid growth. The country is expected to post a gain of about 7.5% in economic output for 2012.

Furthermore, many coal producers have shut production at a number of major mines recently in response to low prices and excess inventory. This could lead to more balance in the market over the next couple of quarters and more stable, if not higher prices for coal.

3) Arch Coal is a fairly large company with about $4.2 billion in annual revenues. With the shares below $11, the price to earnings ratio is now around 8 times forward earnings, and this is based on depressed earnings and industry conditions. The average stock in the S&P 500 Index trades for over 12 times earnings, so these shares could see significant gains. The stock also looks undervalued based on book value, which is $16.90 per share.

4) Arch Coal offers a dividend of 44 cents per share, which is equivalent to a yield of over 4%. The average stock in the S&P 500 Index is yielding about 2%, so this stock actually pays investors more than double the average. With a yield like that, investors can afford to wait for a higher share price.

Here are some key points for ACI:
Current share price: $10.71
The 52 week range is $10.44 to $36.20
Earnings estimates for 2012: 84 cents per share
Earnings estimates for 2013: $1.21 per share
Annual dividend: 44 cents per share which yields 4.1%

Long-term investors should consider adding this stock, especially on weakness. It's also worth considering Peabody Energy Corporation (BTU), which as a leading coal producer, has also seen a sharp decline
in its stock price. Peabody shares are trading for just about 7 times forward earnings, and for far less than half of the 52-week high. According to some analysts, Peabody shares could also have substantial upside from the current levels. Howard Weil recently set a $51 price target for the stock.

Here are some key points for BTU:
Current share price: $28.96
The 52 week range is $28.18 to $73.95
Earnings estimates for 2012: $2.87 per share
Earnings estimates for 2013: $4.31 per share
Annual dividend: 34 cents per share which yields 1.2%

Data is sourced from Yahoo Finance.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.