We are maintaining our Buy recommendation on Arch Coal, Inc. (ACI) and increasing our 2008 earnings estimate from $2.37 per share to $2.64 per share. With international and domestic coal prices at record levels, Arch's market driven strategy should help maximize its reserve base. Having significant un-priced volumes of 60% and 77% in '09 and '10, respectively, and recently pricing several million tons of 2008 un-priced production at significant premiums to Q108 prices, we feel that ACI will experience significant earnings growth in the near-term.
Additionally, In Central Appalachia, nearly one third of its 2008 estimated production is metallurgical in nature. This type of coal fetches prices in the triple digits and should boost earnings and cash flow. We see very little downside to the company's story with large near-term upside potential.
We have increased our earnings estimate for 2008 to $2.64 per share from $2.39 per share, and raised our six-month price target to $66 per share. Our increase in earnings estimates and price target are related to our increase in average realized price and production assumptions.
Main growth drivers will be increased realizations per ton in Western Bituminous and Central Appalachian regions, with increases from the PRB in the second half of 2008, the portion of CAPP (Central Appalachian) production sold into the metallurgical market in 2008 and 2009, and the amount of un-priced volume in 2009 and 2010. ACI historically has a forward P/E and enterprise multiple that range between 18x - 27x and 10x -15x, respectively.
With our new earnings outlook of $2.64 per share in 2008, a price per share of $66 yields a forward P/E of 25x and forward Enterprise multiple of 13x. Both of these multiples are within historical ranges and are appropriate relative to its peers.
Historically, Arch's market multiples have traded at a slight discount to its peers. However, we feel that due to ACI's market-driven strategy and significant un-priced position, the company could very likely experience a market multiple expansion and receive a premium for its earnings power.
Trading around $59 per share this offers investors a 12% upside. Based on our beliefs about near term coal pricing trends, the company's ability to respond to increased coal demand, the significant metallurgical portion of its Appalachian production and our forecasted double digit stock value growth, we are maintaining our Buy rating on Arch Coal with a six month price target of $66 per share.
Read the full analyst report on ACI.
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