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Arch Coal Inc. (ACI - Analyst Report), one of the largest coal producers in the U.S., operating 23 mines across the major low-sulfur coal basins of the country, is slated to release its third-quarter 2012 earnings result before the market bell on October 26, 2012.

Recap, Second Quarter-2012

Arch Coal reported a mixed overall performance in the second quarter of 2012 posting a net adjusted loss of 10 cents per share, narrower than the Zacks Consensus Estimate of a loss of 18 cents per share and lower than the year-ago earnings of 44 cents. Plummeting sales volume related to decline in shipments from Powder River Basin (“PRB”) operations was responsible for the lackluster result.

Although the company recorded a steep plunge in coal sales of 14.2%, a year-over-year hike of 15.3% in the sales price per ton spurred the top-line in the second quarter 2012. Total revenue increased by 8% to $1,063.5 million from $985.5 million in the year-ago quarter. Moreover, revenue surpassed the Zacks Consensus Estimate of $1,020.0 million.

Guidance 2012

For 2012, the company expects to sell 135.5–141.5 million tons of coal, which includes 128 – 134 million tons of thermal coal and 7.5 million tons of metallurgical coal. Arch Coal’s capital expenditure in 2012 will likely be in the range of $410 – $430 million.

Zacks Consensus

The Zacks Consensus Estimate for the third quarter 2012 stands at a pro forma loss of 15 cents per share, down 283.13% from earnings of 8 cents reported in the comparable quarter, last year. At present, the Zacks Consensus Estimate ranges from a loss of 33 cents to a loss of 3 cents per share.

For full year 2012, the Zacks Consensus Estimate is at a loss of 47 cents per share, lower than its previous year-end earnings of $1.07 per share. The current Zacks Consensus Estimate ranges between a loss of 74 cents and 30 cents per share.

Estimate Revisions Trend

Agreement

We see considerable estimate revisions at this point. Among the 20 estimates, 1 estimate moved in the upward direction while 3 estimates were revised downwards in the past 30 days for the third quarter. For the said quarter, 1 lone estimate went down in the last 7 days.

For 2012, out of a total of 19 estimates, 1 moved up and 5 trended down over the last month. The past 7 days saw 2 estimates moving south for 2012.

Magnitude

The Zacks Consensus Estimate for the third quarter remained unchanged in the last week. However, the estimate declined by a penny to (15 cents) from (14 cents) in the past month. For full year 2012, the consensus estimate declined by 3 cents in the past 30 days and by a cent in the last 7 days.

Surprise History

With respect to earnings surprises, Arch Coal Inc. has reported unfavorable earnings performance in all of the last four quarters with the second quarter 2012 result being narrower than the corresponding Zacks Consensus Estimate. The earnings surprise in the last four quarters ranges from (123.53%) to 44.44%. The average surprise over the last four quarters remained a negative 33.05%.

Our Recommendation

Arch Coal Inc.’s coal prospects look promising as import demand for coal from the Asian, European and Middle Eastern markets is anticipated to steadily increase in the coming quarters. In addition, the company’s staunch effort in deploying capital to its main operations from the idle ones, maintenance of financial discipline and lesser coal mining cost in the US would help strengthen its future business targets.

However, these positives could be muted by environmental obligations, unexpected increase in costs of input supplies and political risks associated with the company’s overseas operations.

Arch Coal operates in a highly competitive energy market and faces stiff opposition from companies like Consol Energy Inc. (CNX - Analyst Report) and Peabody Energy Corp. (BTU - Analyst Report).

Currently, we are maintaining a long-term Neutral recommendation on Arch Coal Inc. The company has a Zacks #3 Rank implying a short-term Hold rating on the stock.

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