Have Arch Coal Earnings Reached a Turning Point?

Arch Coal (NYSE: ACI) will release its quarterly report on Tuesday, and shareholders expect the struggles for the coal company to continue not only this quarter but well into the future. Yet with hopes that Arch Coal earnings will start clawing their way back toward profitability, some bottom-fishing investors have started looking at the stock as a potential deep-value play.

Arch Coal has suffered from low coal prices that resulted from the glut of domestically produced natural gas from shale gas and other unconventional energy plays. Nat-gas prices have hit bottom and started to rise somewhat, though; more importantly, coal companies have looked abroad in search of more dependable demand for coal consumption. Let's take an early look at what's been happening with Arch Coal over the past quarter and what we're likely to see in its quarterly report.

Stats on Arch Coal

Source: Yahoo! Finance.

Will Arch Coal earnings burn brighter this quarter?
Analysts have gotten more pessimistic about the long-term prospects for Arch Coal earnings, keeping June-quarter estimates steady but widening their loss expectations for the full 2013 year by 10% and for 2014 by 70%. The stock has continued to feel the pain of the industry, falling 12% since late April.

Arch Coal and its industry peers have suffered from the combination of plentiful natural gas and increased regulatory scrutiny of emission levels, spurring many major U.S. coal customers to shift their energy use toward nat-gas. Moreover, Arch Coal has suffered particularly hard, as its Appalachian coal operations have higher costs and were more convenient to utility-company customers in the eastern half of the country. Despite spending millions on lobbying efforts, Arch and its peers still face considerable challenges in fighting legislation that could further hurt the industry.

In response, Arch Coal has sought to increase its exports to countries where coal is still in higher demand. With its deal with Kinder Morgan (KMI +1.80%) to help boost its export capacity, Arch hopes that boosting its access to export markets will provide a new avenue for selling its coal. Yet again, Arch suffers a competitive disadvantage here compared to rival Peabody Energy (BTU +0.00%), because Peabody's resources are better located strategically to take advantage of export opportunities.

Still, the prospects for domestic lower-emission coal use haven't disappeared entirely. Last month, utility giant Duke Energy (DUK +0.33%) brought a coal gasification plant into operation, which offers 70% fewer pollutants and 50% less carbon dioxide than traditional coal-fired power plants. If nat-gas prices rise back toward more typical levels, then such efforts could make coal use more price-competitive while addressing pollution concerns.

Arch has chosen to take some dramatic measures to shore up its balance sheet and unlock shareholder value. Late last month, it sold off some of its coal assets in Utah to a private company for $435 million, with CEO John Eaves pointing to the benefits of focusing on its most important assets and boosting its financial flexibility in making the sale.

In the Arch Coal earnings report, be sure to compare the company's results with Peabody's earnings report from earlier this week. With Peabody having seen its stock surge on an unexpected profit that overcame a 13% drop in revenue, Arch Coal needs to demonstrate its own ability to make the most of tough conditions in order to give investors the hope for a lasting turnaround.

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