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.