Is Arch Coal a Dangerous Investment?

With shares of Arch Coal Inc. (NYSE:ACI) trading at around $5.14, is ACI an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Was it over for Arch Coal when the market sank in 2000? No! Was it over when the financial crisis sent Arch Coal into a nosedive in late 2008? No! Is it over with Arch Coal trading at just above $5 per share? No! The stock has always made a comeback – no matter how gloomy the situation. The point here is that history tends to repeat itself. However, there are still several concerns, which include:

  • Weak sales volume
  • Increase in operating expenses
  • Weak domestic market
  • Rise of natural gas
  • Regulatory pressures
  • Unimpressive Q4 results

The wildcards here are China and India. Coal is cheap, and China and India like cheap. With such enormous populations, the demand for coal from these two countries has the potential to be enormous. However, China states that it would like to move toward cleaner energy to curb pollution. We’ll see how long that lasts. Clean energy isn’t exactly cheap.

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There’s also an interesting phenomenon taking place with Arch Coal. In most cases, when insiders consistently purchase shares, that stock eventually moves higher. In this case, insiders have been wrong on several occasions. Insiders have been buying shares for years, but the stock has continued to drift lower. Perhaps these insiders will still be correct over the long haul, but the stock would have to move quite a bit for those losses to be recouped.

Arch Coal was rated an OUTPERFORM here last month. The stock moved higher for a while before coming back down yesterday. However, the past means nothing. What is the future likely to hold? We’ll get to that in the Conclusion section. For now, the chart below will compare fundamentals for Arch Coal, Alpha Natural Resources (NYSE:ANR), and Peabody Energy Corp. (NYSE:BTU). Arch Coal has a market cap of $1.09 billion, Alpha Natural Resources has a market cap of $1.73 billion, and Peabody Energy has a market cap of $5.54 billion.

ACI

ANR

BTU

Trailing   P/E

N/A

N/A

N/A

Forward   P/E

N/A

N/A

11.28

Profit   Margin

-16.74%

-34.94%

-7.25%

ROE

-21.22%

-39.49%

-9.01%

Operating   Cash Flow

 $332.80 Million

$518.42 Million

$1.52 Billion

Dividend   Yield

2.20%

N/A

1.60%

Short   Position

14.50%

14.70%

4.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

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