Recent Headlines Miss the Point for Arch Coal

More than ever before, successful investing requires excellent vision -- so please, check that prescription and keep those Foolish lenses clean. Fools hopefully see the forest for the trees, and if they look long and hard they can also distinguish between near-term market dislocations and long-term fundamentals. As we'll see below, Jim Cramer doesn't own a pair of Foolish lenses.

Echoing the resounding theme of this third-quarter earnings season, Arch Coal (NYSE: ACI  ) indicated some near-term reduction in U.S. demand for its Powder River Basin coal. The company adjusted 2008 guidance accordingly, but reiterated a longer-term outlook that remains rock-solid. In the context of the 75% free-fall of Arch Coal shares from their summer peak, closely matched by losses in the industry-tracking Market Vectors Coal ETF (NYSE: KOL  ) , Arch Coal's earnings were a pre-Halloween graveyard smash.

Arch's net earnings tripled over the prior year's three-month and nine-month periods, setting the stage for record 2008 results. Compared with the second quarter, way back when coal was a runaway profit train and Arch shares traded for four times their present value, average coal sales prices dropped by only 3%. Although the Powder River Basin segment dragged overall margins down by 11% sequentially, prices for Central Appalachian coal actually increased substantially over the second quarter.

Predictably, despite the obvious disconnect between this earnings performance and recent share performance, Arch's adjusted guidance yielded a barrage of headlines that failed to convey the important story. With the news wires warning of "dwindling demand," and Jim Cramer pronouncing the end of Arch's reign, it's no wonder Fools are questioning their own unique perspectives on this industry.

Here's the point
Within its earnings statement, though, Arch offered a headline of its own that might as well have been pulled from any of my recent articles: "long-term market fundamentals remain intact despite near-term trends." Competitors Peabody Energy (NYSE: BTU  ) and Foundation Coal Holdings (NYSE: FCL  ) both issued very similar assessments with their recent earnings releases. Coal formed the indisputable secret to success for rail companies CSX (NYSE: CSX  ) and Norfolk Southern (NYSE: NSC  ) . CONSOL Energy (NYSE: CNX  ) President and CEO J. Bret Harvey believes, "the recent sell-off in coal equities appears to be disconnected from current physical coal supply and demand fundamentals."

For Fools who continue to look carefully, that disconnect is not only visible, but indicative of a sector ripe with investment opportunities.

Further Foolishness:

The "Coal" tag within the Motley Fool CAPS community lists 22 coal companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker has enjoyed some great rock climbing trips in Appalachian coal country and hopes the industry will exercise environmental restraint. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Arch Coal, Market Vectors Coal ETF, and Peabody Energy. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 30, 2008, at 12:42 PM, beegdawg007 wrote:

    All that you have written about Arch Coal is true. However, it is no secret. The mean EPS estimate for next year is, afterall, $5.38. And there are other coal companies which are even more underpriced going forward. For example, James River Coal, Walter Industries and Patriot Coal are all trading with forward PEs of less than 3. It is also worth noting that over 80% of all thermal coal sales World Wide for 2009 are now under contract. In addition, with the exceptional pricing of Met coal under contract for the first half of 2009, all Met coal companies will produce steller earnings in 2009, even if Met Coal prices decline by 50% during the 2nd half. Given that the supply of high quality Met Coal will remain very flat for the foreseeable future, and that there are 370Gwatts worth of new coal powered electric plants coming on line during the next five years, coal is the real deal and will be a commodity that is in high demand for at least five years. My take is the best investment right now is to simply own KOL, the Coal ETF.

  • Report this Comment On October 31, 2008, at 1:34 PM, Brettze wrote:

    whenever you read stories about alternate energy , you read about new green installments that will provide maybe 15 megawatts here and there or occassionally up to 100 megawatts.. We dont read in the same articles about comparing these to projected new coal fired powerplants that will total 300-400 gigawatts over the next 5 years.. Who do the green advocates think they are kidding? the largest solar panel maker will finally produce only one single gigawatt worth of solar modlues a year. Combined, the solar and wind and whatever probably wont pass the 10 gigawatt a year in 5 year.. This tell me that our government just cannot afford to subsidize us in any meaningful sums by today's world standards. This is just a feel good politics to make those few green people hopping happy and popping champangnes... It is similar to Habitat for Humanity or The Extreme Makeover on TV shows.. Very limited potential... We can go much bigger in alternate energy if we sell many other fossil energy dependent stocks and invest in those alternate energy stocks all the way past a trillion dollar worth.. or two... Will it happen? I dunno.. Anyway,, this is why energy conservation is the greenest idea above all... All we need to do is to tell eachother to flip switches on not only lamps, but also dryers, thermostats, jacuzzis, second freezers, idle computers, the long list goes on... We can conserve as much as 300 gigawatts worth of coal fired powerplants now under planning... Energy conservation runs on , guess what?, your mindpower....

  • Report this Comment On October 31, 2008, at 1:35 PM, Brettze wrote:

    Use your mindpower not fossil energy!! Use your mindpower to conserve energy!! Use your mind, use your mind!!!

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