Alpha Natural Resources Vs. Arch Coal: Is There A Clear Winner?

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Includes: ANRZQ, ARCH
by: Tactical Investor

The coal sector has taken a beating and from a contrarian perspective makes for a great play as it is detested and is being ignored by most investors. Some of the stocks in the sector are attempting to put in a bottom. We are going to examine two companies in this sector and pit them against each other in the hopes of finding a champion. At the end of the article we will offer our opinion as to which one we think is better.

Reasons to be bullish on Alpha Natural resources (ANR):

  • Quarterly revenue growth rate of 71%.
  • Positive levered free cash flow of 454 million.
  • A strong institutional presence; Percentage held by Institutions = 79%.
  • EBITDA increased from $526 million in 2009 to $899 million in 2011.
  • Cash flow per share increased from $4.91 in 2009 to $8.01 in 2011.
  • Sales surged from $2.4 billion in 2009 to $7.10 billion in 2011.
  • A five-year ROE of 12.81.
  • A 5 year historic EPS growth rate of 23.9.
  • A current ratio of 1.47 and a quick ratio of 1.13.
  • A projected3-5 year EPS growth rate of 5%.
  • A five-year sales growth rate of 30%.
  • A long-term debt to equity ratio of 0.39.
  • A free cash flow yield of 5.28%.

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Reasons to be bullish on Arch Coal Inc (ACI):

  • Strong institution support: Percentage held by Institutions = 79%.
  • Net income is trending upwards for the past three years even though it dropped in 2011 it is still almost over 100 million higher than it was back in 2009. In 2009, it stood at $42 million in contrast to $142 in million in 2011.
  • EBOTDA has increased from $450 million in 2009 to $824 million in 2011.
  • Cash flow has increased from $2.41 in 2009 to $3.14 in 2011.
  • A decent quarterly earnings growth rate of 19%.
  • An operating margin of 9.44%.
  • A good current ratio of 1.55.
  • A free cash flow yield of 5.05%.
  • A 3-5 year projected EPS growth of 11.8%.
  • A five-year sales growth of 11%.

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Company: Alpha Natural resources

Basic overview

  1. Percentage held by Institutions = 79%.
  2. Levered free cash flow of $454 million.
  3. Operating margin= 6%.
  4. Quarterly revenue growth rate = 71%.
  5. Beta = 2.69.

Growth

  1. Net Income ($mil) 12/2011 = -677
  2. Net Income ($mil) 12/2010 = 96
  3. Net Income ($mil) 12/2009 = 58
  4. EBITDA ($mil) 12/2011 = 899
  5. EBITDA ($mil) 12/2010 = 809
  6. EBITDA ($mil) 12/2009 = 526
  7. Net Income Reported Quarterly ($mil) = -29
  8. Cash Flow ($/share) 12/2011 = 8.01
  9. Cash Flow ($/share) 12/2010 = 7.46
  10. Cash Flow ($/share) 12/2009 = 4.91
  11. Sales ($mil) 12/2011 = 7109
  12. Sales ($mil) 12/2010 = 3917
  13. Sales ($mil) 12/2009 = 2496
  14. Annual EPS before NRI 12/2007 = 0.45
  15. Annual EPS before NRI 12/2008 = 2.63
  16. Annual EPS before NRI 12/2009 = 1.98
  17. Annual EPS before NRI 12/2010 = 2.17
  18. Annual EPS before NRI 12/2011 = 1.57

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Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 5
  2. 5 Year History EPS Growth = 23.94
  3. ROE 5 Year Average = 12.81
  4. Current Ratio = 1.47
  5. Current Ratio 5 Year Average = 2.38
  6. Quick Ratio = 1.13
  7. Cash Ratio = 0.76
  8. Interest Coverage Quarterly = N/A
  9. Book Value Quarterly = 33.72

Company: Arch Coal Inc

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Basic overview

  1. Percentage held by Institutions = 79%
  2. Operating margin= 9.44
  3. Quarterly revenue growth rate = 19.10%
  4. Beta = 2.29

Growth

  1. Net Income ($mil) 12/2011 = 142
  2. Net Income ($mil) 12/2010 = 159
  3. Net Income ($mil) 12/2009 = 42
  4. EBITDA ($mil) 12/2011 = 824
  5. EBITDA ($mil) 12/2010 = 731
  6. EBITDA ($mil) 12/2009 = 459
  7. Net Income Reported Quarterly ($mil) = 1
  8. Cash Flow ($/share) 12/2011 = 3.14
  9. Cash Flow ($/share) 12/2010 = 3.67
  10. Cash Flow ($/share) 12/2009 = 2.41
  11. Sales ($mil) 12/2011 = 4286
  12. Sales ($mil) 12/2010 = 3186
  13. Sales ($mil) 12/2009 = 2576
  14. Annual EPS before NRI 12/2007 = 1.21
  15. Annual EPS before NRI 12/2008 = 2.45
  16. Annual EPS before NRI 12/2009 = 0.42
  17. Annual EPS before NRI 12/2010 = 1.14
  18. Annual EPS before NRI 12/2011 = 1.07

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Dividend history

  1. Dividend Yield = 2.00
  2. Dividend Yield 5 Year Average = 1.61
  3. Dividend 5 year Growth = 10.2

Dividend sustainability

  1. Payout Ratio = 0.57
  2. Payout Ratio 5 Year Average = 0.4

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 11.8
  2. 5 Year History EPS Growth = -11.8
  3. ROE 5 Year Average = 10.76
  4. Current Ratio = 1.55
  5. Current Ratio 5 Year Average = 1.27
  6. Quick Ratio = 0.79
  7. Cash Ratio = 0.33
  8. Interest Coverage Quarterly = 0.74

Conclusion

Both plays have taken a massive beating and are trading at multi year new lows and from a contrarian perspective they are both worth looking at.

Alpha natural resources has the lead in the following metrics:

  • A Quarterly revenue growth rate of 71% VS 19% for Arch coal
  • It is trading almost $25 below book Vs. $11 for Arch Coal
  • A positive levered free cash flow of $454 million Vs. -$35.06 million for Arch Coal
  • A five year ROE average of 12.8 Vs. 10.96
  • A Five year historic EPS growth rate of 23.9 Vs. 11.8
  • A long term debt to equity ratio of 0.39 Vs. 1.23 for Arch coal
  • A five year sale growth rate of 30% Vs. 11% for Arch coal
  • A quick ratio of 1.13 VSP 0.79

Arch Coal leads in the following metrics:

  • A projected growth rate of 132% for 2013, Vs. 56% for Alpha Natural Resources
  • Profit margin of 1.97% Vs. -9.7% for Alpha for Alpha Natural Resources
  • A current ratio of 1.55 Vs. 1.47 for Alpha Natural Resources for
  • 3-5 year EPS estimated EPS growth rate of 11.8% Vs. 5% for Alpha Natural resources
  • Percentage short of float stands at high 24.3% VS 9% for Alpha Natural resources making it a better candidate for a short squeeze

We would lean slightly (keyword being slightly) in favor of Alpha natural resources as it has a better current ratio, a stronger quarterly revenue growth rate, a better long term debt to equity ratio, a positive free cash flow and its trading over $25 below book. Dividend investors might favor Arch coal because it pays out a small dividend in contrast to Alpha natural resources.

Disclosure:

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings and growth estimates sourced from dailyfinance.com. Ycharts data sourced from Ycharts.com.We might sell Naked put on both these stocks if certain technical signals are generated over the next 2-3 days.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.