Can Arch Coal Climb Out of Its Hole by Year's End?

With half of 2012 in the record books, it's important to take a look at whether the stocks that interest you can live up to their full potential. By making sure you know about a company's future plans and possible challenges, you can make a better decision about whether it's a smart investment for your portfolio.

Today, let's take a look at Arch Coal (NYSE: ACI  ) . As we saw in our look at Arch Coal earlier this month, a huge plunge in coal demand from electric utilities due to low natural gas prices has punished the entire industry. Moreover, with China's economy starting to slow down, some question whether export volume will hold up. Let's take a quick look at Arch Coal's prospects for the rest of the year and beyond.

Stats on Arch Coal

Average Stock Price Target $10.62
2012 EPS Estimate ($0.50)
2013 EPS Estimate ($0.20)
2012 Sales Growth Estimate (5.5%)
2013 Sales Growth Estimate 6.7%
CAPS Rating (out of 5) ***

Source: Yahoo! Finance.

What could make Arch Coal bounce higher?
It's never good to be on a list of the year's biggest losers, but it isn't hard to understand why. The combination of low gas prices and tighter environmental standards makes it far easier for power plants to avoid using coal.

But a turnaround may be coming. A 50% rise in the United States Natural Gas ETF (NYSE: UNG  ) demonstrates the rapidity with which natural gas prices have recovered to their current level of around $3. It takes time for companies to switch fuels, but eventually, price disparities between gas and coal should reach a new equilibrium, and coal should stop dropping.

Still, that process could take a while. Even though Patriot Coal declared bankruptcy earlier this month, the company plans to keep producing coal during the reorganization process. That leaves Peabody Energy (NYSE: BTU  ) , Alpha Natural Resources (NYSE: ANR  ) , and Arch fighting among themselves as they consider shutting down more mines to cut supplies and hopefully bring prices back up.

The big question is whether consolidation in the coal industry will accelerate. With both Peabody and Walter Energy (NYSE: WLT  ) remaining profitable, it may be tempting for them to pounce on weaker competitors like Arch. If that happens, shares of coal miners across the industry could rise quickly.

Arch Coal needs a catalyst to advance, and so far, there doesn't look to be one on the horizon. If it can survive without losing too much money, then Arch should reach the other side of the coal downturn with potential for sizable gains.

If you like prospects for energy, let us show you another stock you should look at more closely. Read about it right here in the Motley Fool's special free report on the energy industry and its best prospects.

Click here to add Arch Coal to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter @DanCaplinger. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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