Friday, September 19, 2014

Seeking Alpha: Arch Coal Still Looking For Light At The End Of The Tunnel

Badly beaten-down stocks can often look quite tempting to investors who appreciate how often the Street overshoots both during good times and bad. In the case of coal, though, that remains a difficult trade. Asian producers like China Shenhua (OTCPK:CSUAY) and PT Bukit Asam (OTCPK:TBNGY) continue to perform relatively well (as I've written here and here), but weak met coal pricing and ongoing rail disruptions in the Powder River Basin are bedeviling Arch Coal's (NYSE:ACI) operations.

Very few analysts are willing to stick their necks out for Arch Coal at this point, with five Strong Buy/Buy ratings matching the Underperform/Sell ratings (and 11 in the middle at "Hold"), and the short interest is around 15%. There is certainly still a real risk that met coal prices don't recover as expected (or should I say hoped?) in 2015 and beyond, and likewise a risk that domestic thermal demand declines further.

It's also very difficult to construct a model wherein these shares look truly cheap. All of that said, Arch Coal has about $1.25 billion in liquidity today, no major maturities until 2018, and may be able to limit the cash burn to $500 million between now and a return to positive free cash flow in 2017 or 2018. I'd much rather own China Shenhua, PT Bukit Asam, Peabody (NYSE:BTU), or Cloud Peak (NYSE:CLD) from a safety/certainty standpoint, and I still think Arch Coal is looking at a very difficult road, but I suppose there's a play here for investors who think that coal pessimism could bottom.

Read more here:
Arch Coal Still Looking For Light At The End Of The Tunnel

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