The second largest coal dealer in the US Arch Coal Inc. (NYSE: ACI) is expected to report its fourth quarter results on January 28, 2011. In the last three quarters of FY 2010, Arch Coal's reported EPS missed analysts' consensus estimates for quarters ended March 2010 and September 2010, by margins of 62.50 percent and 5.40 percent, respectively. For the quarter ended June 2010, the reported EPS of the company exceeded analysts' consensus estimate by margin of 8 percent.
Arch Coal, Inc. sold approximately 126.1 million tons of coal, including approximately 7.5 million tons of coal, it purchased from third parties, in 2009. The company sells coal to power plants, steel mills and industrial facilities. As of December 31, 2009, it operated 19 active mines at 11 mining complexes located in the United States. The company is responsible for 8 percent of the electricity generated in the U.S., a large amount when considering that about 48 percent of U.S. electricity comes from coal power. The company operates in three segments: the Powder River Basin, the Western Bituminous region and the Central Appalachia region.
Q3 FY 2010 results missed analysts' estimates
For the third quarter of FY 2010, Arch Coal reported revenues of $874.7 million, up 42 percent compared to revenues of $615 million in the third quarter of FY 2009. The company reported net income of $46.7 million, or $0.29 per diluted share compared with net income of $25.2 million, or $0.16 per diluted share in the third quarter of FY 2009. Adjusted EBITDA rose nearly 70 percent to reach $532 million year-to-date in 2010. Cash flow from operations totaled $457 million for the nine months ended September 30, 2010 - an increase of 85 percent over the prior-year period - while capital expenditures equaled $222 million, resulting in record free cash flow of $235 million for the first nine months of 2010.
Full FY 2010 earnings guidance by Arch Coal
For the full FY 2010, Arch Coal Inc. expects its earnings per diluted share on a GAAP basis to be between $0.94 per share and $0.98 per share, including amortization of coal supply agreements and early debt extinguishment costs. The adjusted earnings per diluted share for full FY 2010 is expected to be in the range of $1.11 per share to $1.15 per share, which is below the adjusted EPS annual guidance range of $1.25 per share to $1.40 per share given on October 29, 2010.
As a form of energy, coal faces most of its competition from natural gas, a cleaner burning source of power. If natural gas prices fall, the entire coal industry could face a drop in revenue as power consumers turn to the cheaper form of energy. Arch Coal competes with Peabody Energy Corp. (NYSE: BTU), CONSOL Energy Co. (NYSE: CNX), and Massey Energy Co. (NYSE: MEE). In the last one year, Peabody Energy has reported earnings of $2.42 per share, on revenues of $6.60 billion. CONSOL has reported earnings of $1.87 per share, on revenues of $5.05 billion. However, Massey Energy reported a loss of $0.77 per share, on revenues of $2.90 billion. On the other hand, Arch Coal reported earnings of $0.69 per share, on revenues of $3.01 billion.
Arch Coal has a P/E ratio of 48.15, much higher than the industry's average P/E of 19.18. The P/S ratio of the company is 1.78, which is much lower, compared to industry's P/S of 6.49. The quarterly revenue growth of the company is 42.20 percent, compared to industry's 15.90 percent.
Analysts' estimates lower earnings compared to same quarter previous year
For the fourth quarter ending December 31, 2010, analysts' EPS estimates range from a low of $0.31 to a high of $0.54 per share, compared to the consensus estimate of $0.43 or $0.54 per share earned in year ago same quarter. Analysts' revenue estimates for the fourth quarter range from a low of $721.80 million to a high of $923.28 million, compared to a consensus estimate of $850.44 million or $725.47 million reported in the same quarter a year ago. For the quarter ended December 31, 2010, the consensus EPS forecast has been downgraded to the current estimate of $0.43 per share, from $0.52 estimated 60 days ago.
In September 2006, the company's board of directors authorized a share repurchase program, for the purchase of up to 14,000,000 shares of the company's common stock. At December 31, 2009, 10,925,800 shares of common stock were available for repurchase under the plan. During 2008, the company repurchased 1,511,800 shares of its common stock under the repurchase program at an average cost of $35.62 per share. On October 21, 2010, the company's board of directors declared a quarterly cash dividend of $0.10 per share on the company's common stock. In the last 52 weeks, the company's stock has been trading in the range of $19.09 and $36.50. In the last one year, Dominion's stock has gained 34 percent in value to settle at $33.08 on January 26, 2011. After analyzing the company's financials, I set an EPS target for FY 2010 at $1.12 per share, and for FY 2011 at $2.50 per share. Based on the EPS estimates, I see a one year target price of $38.50.
