Arch Coal (NYSE:ACI) didn't just beat the Street this quarter. It smoked it, coming in about 45% higher than analysts' average estimates. Interestingly, there was at least one analyst who had it about right (an estimate of $0.85), and at least one other who was really, really wrong (an estimate of $0.26). Wonder what the calls from fund managers to that analyst have been like today..
I figured that Arch Coal would do well (as usual) this quarter, but not this well. Revenue was up 6%, and while volumes were soft (down 17% or 14%, depending upon whether you include pass-through deals), price realizations were very good indeed. The average price realized per ton was up more than 45% in the Powder River Basin, and up more than 36% for Western bituminous coal.
Operating cost improvements were equally exceptional. Past outages and rail issues haven't completely vanished, but the consolidated per-ton operating cost actually declined, and the consolidated per-ton margin more than tripled.
In response to this quarter, management lifted the lower end of its guidance for the year, but left the top end intact. Interestingly, it was more optimistic on the rail situation in the West; I thought many of those tracks were due for maintenance this month or next.
Whatever the case may be, there's no denying the strength of the market. Whether it's Peabody (NYSE:BTU), Massey (NYSE:MEE), Foundation (NYSE:FCL), or the other publicly traded coal companies, we're hearing the same themes over and over again. Good economic conditions are leading to more energy demand, power companies don't have enough coal, there are limits to production and shipment increases, and even more new coal plants are on the books.
Relative to total production volumes, Arch seems to have at least one-fourth more capacity left unpriced than Peabody. To me, this suggests that Arch should be more exposed to spot coal prices (whether good or bad). I like Arch Coal, but I would at least look at CONSOL (NYSE:CNX) and Foundation (NYSE:FCL), since both seem like possibly interesting relative values today. But if we see another broad freak-out across the sector, I'd look at the whole lot of 'em.
All aboard for more Foolish thoughts on coal:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
