Dead Coal Walking

Nick Hodge |

If you want to establish a long-term position in a near-billion-dollar company whose product isn't going away anytime soon, you have an opportunity to do so at today's levels.

Arch Coal (ACI) recently reported first quarter earnings, beating analyst estimates for revenue but falling short on profit. Revenue came in at $736 million versus the Street consensus of $718 million. But the company lost $0.60 per share against the forecast $0.42 loss.

This led to a number of banks issuing new guidance, the sum of which was positive:

•  Citigroup reiterated “neutral” with a $5.10 price target

•  Goldman upgraded from “sell” to “neutral” with a $5.00 price target

•  UBS downgraded to “sell” with a $3.00 price target

Of the 16 banks covering the stock, five have a “sell” rating, eight have a “hold” rating, and three have a “buy” rating, with Goldman giving this explanation for its upgrade:

We raise Arch Coal from Sell to Neutral, with 4% upside to our new 6-month, $5 price target. While we are still concerned about high valuation levels and low margins at its met segment, we believe [Arch Coal] will likely benefit from the recovery in the Powder River Basin. High levels of liquidity make negative free cash flow over the next three years less of a concern for [Arch Coal] than for [Walter Energy], in our view.

Coal is still struggling with its public image, especially here in the States. But the fact remains that it supplies ~33% of the world's electricity and is expected, according to International Energy Agency forecasts, to remain the leading source of electricity generation through 2035. The IEA's World Energy Outlook 2013 noted:

Coal remains the largest source of generation, with strong growth in non-OECD countries far outweighing reductions in OECD countries. Coal-fired generation rebounds in the short term in the United States, reversing the recent coal-to-gas switch, as gas prices recover from very low levels.

Coal is also the world's fastest-growing energy source, with demand forecast to rise 2.3% per year through 2018.

And while it's being shunned in the U.S., our vast reserves are quickly finding new homes with exports on the rise:

 

us_coal_exports_graph.jpg

Coal even graced the cover of Wired magazine's April issue with the headline: “Coal: It's Dangerous, It's Dirty, and It's the Future of Clean Energy.”

wired_magazine_coal.jpg

Dead Coal Walking

The Motley Fool said “This Is What the Death of Coal Looks Like” in May 2012.

Bloomberg declared “Cheap Coal Is Dead” in June 2012.

Slate said “Coal Is Doomed” later that year.

HuffPo proclaimed “Coal Is Dead” most recently, calling the time of death February of this year.

I am telling you the opposite is true.

Now with natural gas prices doubling over the past year... use of coal for electricity generation in the U.S. is back on the rise.

Coal generated 42% of U.S. electricity in the first quarter — the highest level since mid-2011.

coals_share_of_us_electricity_chart.jpg

These aren't postmortem twitches. Coal is expected to be the fastest-growing global source of energy over the next decade.

Now Bloomberg is reporting that “Coal's Share of World Energy Demand at Highest Since 1970.”

As a result, Arch Coal has outpaced broader markets over the past month — adding as much as 7%.

 

june_2014_arch_coal_chart.png

 

And I'm starting to see more articles bullish on coal.

You can buy Arch Coal today below $3.00.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ACI Arch Coal Inc. n/a n/a n/a 0
TEK.LV:PUR TEK.LV:PUR n/a n/a n/a 0

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