Arch Misses; Outlook Remains Strong - Analyst Blog

Coal producer Arch Coal Inc. (ACI) reported net adjusted earnings of 33 cents per share for the fourth quarter 2010, which is below the Zacks Consensus Estimate of 46 cents. For the full-year 2010, Arch Coal posted adjusted earnings of $1.14, which outperformed Zacks Consensus Estimate of $1.12 by 2 cents.

GAAP net earnings during the quarter were 29 cents per share versus 1 cent earned in the year ago quarter. GAAP earnings for the quarter included pre-tax charges related to non-cash amortization of coal supply agreements acquired with the Jacobs Ranch transaction.

Earnings, on a GAAP basis, for 2010 summed to 97 cents compared to 28 cents earned in 2009.

Total Revenue

Arch's total revenue of $835.4 million in the fourth quarter was $26.6 million below the Zacks Consensus Estimate of $862 million. Revenue was also above the year-ago revenue of $725.5 million, reflecting a growth of 15%, mainly on higher sales volume.

Net revenue for 2010 improved 25% year over year to a record $3.19 billion, which marginally surpassed the Zacks Consensus Estimate of $3.17 billion.

Operational Update

Arch sold about 42.0 million tons of coal in the reported quarter, bringing the full-year volumes to 161.3 million tons. These were well above the sales volumes in their respective prior-year periods.

Arch pointed out that its operating regions turned in solid performances in the fourth quarter pushing down the company's total cash cost-per-ton of coal by 0.8% to $13.59 from $13.70 in the previous quarter. Given the rigorous cost-controls measures implemented throughout the year, cash cost-per-ton of coal for 2010 declined 11.8% year over year to $13.66.

Consolidated operating margin per ton contracted 6% sequentially in the fourth quarter of 2010, resulting from modest declines in overall sales volume from the third quarter of 2010. Consolidated annual operating margin increased 60% in 2010 versus 2009, benefiting from improved coal market conditions. Margin growth for the year was greatly helped due to a higher percentage of Powder River Basin contribution in the company's overall volume mix.

Adjusted earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) increased 33% to reach $192.3 million in the reported quarter. Adjusted EBITDA for the year also grew 58% to $724.1 million compared to $458.7 million in 2009.

As a result of effective cost control programs, Arch's operating profits grew significantly to $86.9 million (up 194.6%) in the fourth quarter and $324.0 million (up 161.9%) for 2010.

Financial Update

Arch displayed a much stronger financial performance in 2010 versus 2009, resulting from substantially higher margins earned in each operating region. Cash flow from operations totaled $697 million as of December 31, 2010, an increase of 82% over the prior-year period.

Capital expenditures for the quarter summed $93.1 million, bringing full year spending to $314.7 million. Also, Arch reached a record free cash flow level of $382.5 million at the end of 2010, which further bolsters its balance sheet.

Guidance

Going forward, Arch believes it is exceptionally well positioned to capitalize on the ongoing recovery in U.S. coal markets – and the coal market super-cycle that it believes is already underway globally. However, the company retained that its first quarter 2011 results will be hurt by the idling of the longwall at Mountain Laurel, as announced on January 11, 2011.

For 2011, Arch expects its total sales volumes to range between 155 and 160 million tons. The guidance includes expected metallurgical coal sales of around 7 million tons.

Arch said its adjusted EBITDA in 2011 will be in the range of $910−$1,030 million. Depreciation, depletion and amortization guidance is projected at $378−$388 million. Capital expenditure at Arch Coal is expected to reach the $370−$410 million range.

Arch Coal expects its 2011 earnings to range between $2.00 and $2.50 per share. On a GAAP basis, the company's EPS guidance, including amortization of coal supply agreements, is between $1.93 and $2.42.

Our View

Though Arch's quarterly results missed the Zacks estimates, we believe the company will benefit from the improving outlook of the global coal markets given its well-capitalized, low-cost operations.

Arch Coal's primary competitor Peabody Energy Corporation's (BTU) recent results nearly doubled the year-ago comparisons and also smoothly outperformed the Zacks Consensus Estimates on the back of strong revenue growth across various regions. The company also benefited from favorable coal prices during the fourth quarter.

Arch Coal currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long-term ‘Neutral' rating on the stock.

 
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