Coal, the oft-maligned fossil fuel, is finally gaining some steam. The pairing of unprecedented demand for steel products and supply disruptions in Australia has recently fired up coal prices, and the first-quarter results released by Arch Coal (NYSE: ACI ) on Monday suggest these price increases are no blip on the screen.
Arch Coal reported net earnings of $0.56 per fully diluted share, nearly triple the $0.20 from the prior year's first quarter. Revenue rose 22% to $700 million, while operating margin per ton was better by an impressive 57%, at $3.32 versus $2.11 in the year prior. Even sequentially, the margin rose 15% from $2.88.
Investors have plenty of forward-looking statements to mull over from the earnings release, all of which reflect an unwaveringly bullish sentiment for coal prices going forward and for the strength of Arch Coal's position to capitalize on the trend. For example, the company has locked in sales contracts well into 2009, many of which are priced at levels at least 40% higher than those realized in the first quarter.
Another portion of these contracts was strategically left as unpriced supply commitments, providing further leverage to the anticipated continuation of the uptrend in prices. Significantly, most of the company's metallurgical coal production remains unhedged for 2009.
The statement which really caught this Fool's eye, though, involved the company's read on the global coal supply situation. According to the release, the demand for coal worldwide will outstrip supply by 25 million to 35 million tonnes, with that number expected to grow steadily through 2010. From a macroeconomic standpoint, this statement paints a glowing portrait of the prospects for coal and related equities, even taking into account the 50% gain which Arch Coal shareholders have already enjoyed over the past 30 days.
With Peabody Energy (NYSE: BTU ) and Massey Energy (NYSE: MEE ) both set to release earnings this week, investors may see the heat continue to rise from this sector. Though moves like we've seen in Arch Coal and Massey shares of late are tough to chase, the underlying trend is very real. The more conservative Fool will note that neither Peabody Energy nor the Van Eck Market Vectors Coal ETF (NYSE: KOL ) has moved as dramatically thus far, offering a potentially safer foot in the furnace door.