After a difficult time in 2014, Arch Coal (ACI, Financial) entered 2015 on a soft note. With a net loss of $113 million, the company disappointed investors which resulted in a decline in the share price as the investors didn’t receive the results positively. If we look at the five-year track record, the company’s shares have fallen by a big margin and are trading close to low now. The main reason behind this backdrop is the challenging coal industry. In addition, the lower prices for competing fuels domestically are also having a negative impact on its financial. But, the management has pin pointed some key areas which are growing and can be its growth drivers in future. Let us have a look.
The right moves
The results were not outstanding, but there is some room for improvement. Despite lower shipments and net loss, Arch Coal saw good improvement in EBITDA which has also helped it to expand its cash margins by more than 20%. This hasn’t brought much improvement in the coal market, still the company’s proactive approach seems promising for its future growth in the near term. In response to some growth in the financials, Arch Coal is now focusing on various other initiatives to improve its profitability.
Arch Coal is laser focused on maintaining a lower cost asset base. It is planning to support this initiative further by controlling costs and managing its capital spending. This will also ramp up its profit margins in the coming quarters. These initiatives have also helped it to maintain good liquidity with no near-term debt maturities. The stock is expected to gain good market share on the back of impressive balance sheet.
Still, looking at the market conditions, Arch Coal is expecting a further decline in its performance. Arch Coal is expecting domestic coal consumption for power generation to decline by 80 million tons in 2015. In addition, it is also expecting its top mines to underperform, as it is estimating more than half of the coal burn loss to come out of Appalachia, due to its higher cost structures. While on the other hand, it thinks that the Powder River Basin coal would be the least affected as it remains the most competitive against natural gas.
Promising trends
Arch Coal is however seeing promising trends in the seaborne coal market. A growing demand in the seaborne coal is seen, as the countries such as India, is expanding its power generation with 23GW of new coal based generating capacity which is currently under construction. The company finds it as a bright opportunity in front of it.
Now moving on to the fundamentals, though the company is showing positive growth signs yet this growth is not enough to impact the company’s profitability by a big margin. Looking at the overall coal market, the stock looks struggling. It might further lose market share with a disappointing profit margin of -19.50%. The stock is disappointing in the long term as well as its earnings are growing only by a CAGR of 3.00% as compared to industry average of 13.58%. Hence, investors are suggested to see investment in Arch Coal from side lines until it shows some concrete signs of gaining market share.
