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Category: Stock Market and Arch Coal
Date: 23 October 2019 Stock Price: $83.29 We take a look at the 3rd quarter earnings report of their 2019 fiscal year of Arch Coal, the second largest producer of thermal coal in the United States.
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About Arch Coal
Arch Coal (NYSE: ARCH) is the leading producer of metallurgical coal and the second largest producer of thermal coal in the United States, with a streamlined portfolio of large, modern, low-cost mines and a high-quality reserve base. Arch’s operations have a proven track record of generating cash through all phases of the market cycle, with significant upside in rising price environments. With its solid financial foundation, clean balance sheet and top-tier assets, Arch is exceptionally well-positioned to capitalize on strengthening metallurgical coal markets and recovering thermal coal markets
Overview of Arch Coal's latest earnings report
Data below refers to quarterly data unless specified otherwise:
- Revenues: $619.467 million (down from $633.180 million for the same period of the previous year)
- Revenues decreased by -2.16% over the last 12 months
- Cost and expenses: $512.986 million (down from $550.294 million for the same period of the previous year)
- Cost and expenses decreased by -6.78% over the last 12 months
- Net earnings: $106.769 million (down from $123.192 million for the same period of the previous year)
- Diluted earnings per share: $6.34 (up from $6.10 for the same period of the previous year)
- PE ratio: 3.3
- Dividend declared: $0.45
- Dividend yield: 2.16%
- Diluted weighted-average shares outstanding: 16.852 million (down from 20.208 million for the same period of the previous year)
- Cash and cash equivalents: $175.428 million
- Cash and cash equivalents per share: $10.49
- Cash and cash equivalents makes up 12.6% of Arch Coal's market capital
- Cash and cash equivalents makes up 9.06% of Arch Coal's total assets
- Accounts receivable: $206.149 million
- Accounts receivable makes up 10.65% of Arch Coal's total assets
- Inventories: $171.543 million
- Inventories makes up 8.87% of Arch Coal's total assets
- Stockholders equity in Arch Coal: $705.436 million
- Stockholders equity per share: $41.86
- So Arch Coal is trading a 1.98 times its stockholders equity which is just outside the expected range of between 2 and 4 which most firms ten to trade at.
- Cash generated from operations (for the 9 months): $334.053 million
- Cash generated from operations per share (for the 9 months): $19.82
Arch Coal's management commentary on the results
ST. LOUIS, Oct. 22, 2019 /PRNewswire/ -- Arch Coal, Inc. (NYSE: ARCH) today reported net income of $106.8 million, or $6.34 per diluted share, in the third quarter of 2019, compared with net income of $123.2 million, or $6.10 per diluted share, in the prior-year period. The company had adjusted earnings before interest, taxes, depreciation, depletion, amortization, accretion on asset retirement obligations, amortization of sales contracts, and non-operating expenses ("adjusted EBITDA")1 of $106.6 million in the third quarter of 2019, which includes a $1.5 million non-cash mark-to-market loss associated with the company's coal-hedging activities. Not included in adjusted EBITDA is a $39.0 million gain resulting from the settlement of a 1970s-era land dispute. This compares to $124.9 million of adjusted EBITDA recorded in the third quarter of 2018, which included a $10.4 million non-cash mark-to-market loss associated with the company's coal-hedging activities. Revenues totaled $619.5 million for the three months ended September 30, 2019, versus $633.2 million in the prior-year quarter.
"During the quarter, Arch again exhibited operational excellence and generated strong cash flows across its operating platform despite a pull-back in coking coal prices," said John W. Eaves, Arch's chief executive officer. "Our core Metallurgical segment turned in an excellent cost performance, overcoming elevated costs in the final longwall panel at the Mountain Laurel mine, and our legacy thermal segments generated five times more cash than they expended in capital. In addition, we made significant progress on our ongoing capital return program, investing $91.4 million to buy back nearly 1.2 million shares, bringing total repurchases since May 2017 to nearly 10 million shares, or approximately 40 percent of initial shares outstanding."
During the third quarter, Arch returned a total of $98.4 million to shareholders via buybacks and dividends, and has now returned $255.3 million through the first nine months of 2019, which is 18 percent more than during the same period in 2018. All told, Arch has returned $894.8 million to shareholders since launching its capital return program in May 2017. At quarter-end, Arch had board authorization to expend an additional $233.1 million on share buybacks, out of a total authorization of $1.05 billion.
"We believe we are in a highly advantageous position to drive long-term, sustainable returns for our shareholders across a wide range of market conditions," Eaves added. "In coming quarters, we expect to improve further on our first-quartile coking coal cost position; continue to generate cash from our thermal assets well in excess of our capital spending requirements; drive forward with the accelerated build-out of our world-class Leer South growth project; and return additional capital to shareholders."
Reserve Acquisition at Leer Mine
In September, Arch entered into a definitive agreement to acquire 20 million tons of low-cost, high-quality, High-Vol A coking coal reserves directly adjacent to its Leer mine for a purchase price of $52.5 million. This acquisition, which is expected to close in the fourth quarter, will facilitate an increase of nearly 24 million tons in the Leer mine plan.
These incremental reserves — located in the same seam as the Leer longwall — are contiguous to Leer's existing reserves and accessible underground by the longwall operation without the expenditure of meaningful incremental capital. The purchase price equates to approximately $2.50 per ton, versus an average cash margin at the Leer mine of more than $65 per ton year-to-date in 2019. The reserve addition is expected to extend the life of Arch's flagship operation to the late 2030s, with the potential for still further extensions thereafter.
"We view this transaction as a highly strategic investment in our Leer reserve base, which is the centerpiece of our core coking coal franchise," said Paul A. Lang, Arch's president and chief operating officer. "The Leer reserves contain some of the highest quality, lowest cost and highest margin steel-making coal in the United States. We believe that these reserves provide us with a pipeline of proven, low-risk, and low capital-intensity growth projects that should drive increasing earnings and cash generation well into the future."
Key Market Developments
During the quarter, global coking coal markets weakened in response to slowing steel demand, trade-related tensions and concerns over global economic growth. The average price of Arch's primary product – premium High-Vol A coking coal – declined from an average of nearly $200 per metric ton in the ocean vessel during the year's first half to under $140 per metric ton at the end of the third quarter, according to Platts.
Counterbalancing those concerns to some degree, global coking coal output remains muted. In the United States, several high-cost coking coal mines have idled in recent weeks in response to the lower pricing environment, and U.S. coking coal exports are down 11 percent year-to-date. Australian production is up only modestly and continues to undershoot the peak levels achieved in 2016. Major coking coal producers continue to expend very limited capital on expansion projects. In short, supply and demand appear only modestly out of balance at present, and high-cost production is being taken off line. With its first-quartile U.S. cost structure, Arch is well-positioned to weather the current pull-back.
Outlook
"We are confident in our well-defined strategy for long-term value creation and growth, and we are pursuing it aggressively," Eaves said. "We expect several major drivers to elevate shareholder value in coming quarters regardless of market conditions. These drivers include the build-out of our world-class Leer South mine; the transition of our flagship Leer mine into the heart of its reserve base; the completion of our highly synergistic joint venture with Peabody; and the continuation of our capital return program. Coupled with continued, strong operational execution, these drivers should enhance our already strong competitive position in coking coal markets, increase our cash-generating capabilities significantly, and translate into greater value for our shareholders."
"During the quarter, Arch again exhibited operational excellence and generated strong cash flows across its operating platform despite a pull-back in coking coal prices," said John W. Eaves, Arch's chief executive officer. "Our core Metallurgical segment turned in an excellent cost performance, overcoming elevated costs in the final longwall panel at the Mountain Laurel mine, and our legacy thermal segments generated five times more cash than they expended in capital. In addition, we made significant progress on our ongoing capital return program, investing $91.4 million to buy back nearly 1.2 million shares, bringing total repurchases since May 2017 to nearly 10 million shares, or approximately 40 percent of initial shares outstanding."
During the third quarter, Arch returned a total of $98.4 million to shareholders via buybacks and dividends, and has now returned $255.3 million through the first nine months of 2019, which is 18 percent more than during the same period in 2018. All told, Arch has returned $894.8 million to shareholders since launching its capital return program in May 2017. At quarter-end, Arch had board authorization to expend an additional $233.1 million on share buybacks, out of a total authorization of $1.05 billion.
"We believe we are in a highly advantageous position to drive long-term, sustainable returns for our shareholders across a wide range of market conditions," Eaves added. "In coming quarters, we expect to improve further on our first-quartile coking coal cost position; continue to generate cash from our thermal assets well in excess of our capital spending requirements; drive forward with the accelerated build-out of our world-class Leer South growth project; and return additional capital to shareholders."
Reserve Acquisition at Leer Mine
In September, Arch entered into a definitive agreement to acquire 20 million tons of low-cost, high-quality, High-Vol A coking coal reserves directly adjacent to its Leer mine for a purchase price of $52.5 million. This acquisition, which is expected to close in the fourth quarter, will facilitate an increase of nearly 24 million tons in the Leer mine plan.
These incremental reserves — located in the same seam as the Leer longwall — are contiguous to Leer's existing reserves and accessible underground by the longwall operation without the expenditure of meaningful incremental capital. The purchase price equates to approximately $2.50 per ton, versus an average cash margin at the Leer mine of more than $65 per ton year-to-date in 2019. The reserve addition is expected to extend the life of Arch's flagship operation to the late 2030s, with the potential for still further extensions thereafter.
"We view this transaction as a highly strategic investment in our Leer reserve base, which is the centerpiece of our core coking coal franchise," said Paul A. Lang, Arch's president and chief operating officer. "The Leer reserves contain some of the highest quality, lowest cost and highest margin steel-making coal in the United States. We believe that these reserves provide us with a pipeline of proven, low-risk, and low capital-intensity growth projects that should drive increasing earnings and cash generation well into the future."
Key Market Developments
During the quarter, global coking coal markets weakened in response to slowing steel demand, trade-related tensions and concerns over global economic growth. The average price of Arch's primary product – premium High-Vol A coking coal – declined from an average of nearly $200 per metric ton in the ocean vessel during the year's first half to under $140 per metric ton at the end of the third quarter, according to Platts.
Counterbalancing those concerns to some degree, global coking coal output remains muted. In the United States, several high-cost coking coal mines have idled in recent weeks in response to the lower pricing environment, and U.S. coking coal exports are down 11 percent year-to-date. Australian production is up only modestly and continues to undershoot the peak levels achieved in 2016. Major coking coal producers continue to expend very limited capital on expansion projects. In short, supply and demand appear only modestly out of balance at present, and high-cost production is being taken off line. With its first-quartile U.S. cost structure, Arch is well-positioned to weather the current pull-back.
Outlook
"We are confident in our well-defined strategy for long-term value creation and growth, and we are pursuing it aggressively," Eaves said. "We expect several major drivers to elevate shareholder value in coming quarters regardless of market conditions. These drivers include the build-out of our world-class Leer South mine; the transition of our flagship Leer mine into the heart of its reserve base; the completion of our highly synergistic joint venture with Peabody; and the continuation of our capital return program. Coupled with continued, strong operational execution, these drivers should enhance our already strong competitive position in coking coal markets, increase our cash-generating capabilities significantly, and translate into greater value for our shareholders."
Arch Coal (NYSE: ARCH) stock price history
The image below, obtained from Google, shows the stock price history of Arch Coal since its listing And it's been a pretty good time for Arch Coal stockholders. At its listing the stock was trading at around $61.70 a stock and its currently trading at $83.29 a stock. That's a decent return of 34.9% provided to Arch Coal stockholders over the last 3 years.
The stock of Arch Coal is trading at very close to the midpoint between its 52 week high and 52 week low, which is usually an indication that the short term sentiment and momentum of a stock being neutral.
The stock of Arch Coal is trading at very close to the midpoint between its 52 week high and 52 week low, which is usually an indication that the short term sentiment and momentum of a stock being neutral.
Recent coverage of Arch Coal
The extract below covering Arch Coal is as obtained from TheStreet.com
A study of analyst recommendations at the major brokerages shows that Arch Coal Inc (ARCH - Get Report) is the #40 broker analyst pick among those stocks screened by The Online Investor for strong stock buyback activity. To make that list, a stock must have repurchased at least 5% of its outstanding shares over the trailing twelve month period. In forming the rank, the analyst opinions from the major brokerage houses were tallied, and averaged; then, the list of stocks with strong buyback activity was ranked according to those averages.
Investors are often keenly interested in knowing which companies are buying back their own stock, because companies often will only make such a move if they feel their stock is undervalued. Arch Coal Inc is a company with strong buyback activity that is also considered a compelling buy by analysts; a bullish investor could take this to mean that sharp analyst minds came to the same bullish conclusion as the company itself that the stock is a good value, and therefore the stock should do well in the future.
A study of analyst recommendations at the major brokerages shows that Arch Coal Inc (ARCH - Get Report) is the #40 broker analyst pick among those stocks screened by The Online Investor for strong stock buyback activity. To make that list, a stock must have repurchased at least 5% of its outstanding shares over the trailing twelve month period. In forming the rank, the analyst opinions from the major brokerage houses were tallied, and averaged; then, the list of stocks with strong buyback activity was ranked according to those averages.
Investors are often keenly interested in knowing which companies are buying back their own stock, because companies often will only make such a move if they feel their stock is undervalued. Arch Coal Inc is a company with strong buyback activity that is also considered a compelling buy by analysts; a bullish investor could take this to mean that sharp analyst minds came to the same bullish conclusion as the company itself that the stock is a good value, and therefore the stock should do well in the future.
Arch Coal (NYSE: ARCH) latest stock valuation
So what is Arch Coal stock worth based on the release of their latest earnings report and their fiscal guidance provided? Based on Arch Coal latest earnings report and their outlook our valuation models provide a target (full value) price of Arch Coal stock at $119.90 a stock (up from our 2nd quarter earnings report valuation of Arch Coal). Therefore we believe the stock of Arch Coal is undervalued at its current price of $83.29
We usually recommend that long term fundamental or value investors look to enter the stock at 10% below our target (full value) price which in this case is $119.90, so a good entry point into Arch Coal's stock would be at $107.90 or below. Considering the fact that Arch Coal is trading at well below our suggested entry point into the group's stock we rate Arch Coal as a buy.
We believe that the medium and long term outlook for the group is still very positive (even with global economic growth slowing down which might affect the short and medium term demand for coal) and believe the current stock price represents a good buying opportunity into Arch Coal.
We usually recommend that long term fundamental or value investors look to enter the stock at 10% below our target (full value) price which in this case is $119.90, so a good entry point into Arch Coal's stock would be at $107.90 or below. Considering the fact that Arch Coal is trading at well below our suggested entry point into the group's stock we rate Arch Coal as a buy.
We believe that the medium and long term outlook for the group is still very positive (even with global economic growth slowing down which might affect the short and medium term demand for coal) and believe the current stock price represents a good buying opportunity into Arch Coal.
Next earnings release date for Arch Coal
Arch Coal is expected to release their 4th quarter earnings report for their 2019 fiscal year in late January 2020