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ARCH or HCC: Which is a Better Coal Stock for Your Portfolio?
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After the easing of pandemic-related restrictions, the global economic recovery in 2021 revived industrial and commercial activities worldwide. The rollout of vaccines and the increasing economic activities are steadily boosting the demand for coal in electricity generation, thereby supporting the hike in coal production. This rebound due to global coal demand boosted the profit levels of coal operators and is expected to continue in the near term.
Coal is valued for its energy content and is used worldwide to generate electricity as well as in steel and cement manufacturing. Per the U.S. Energy Information Administration (EIA), U.S. coal production volumes are expected to increase 5% in 2022 to touch 606 MMst (millions of short tons) and improve further by 3% in 2023 to hit 624.3 MMst.
Coal plays an important role in steel production. The strong demand from steel units and the rising coal exports are continuously boosting the prospects of U.S. coal miners. Per the EIA, coal exports were 85.6 MMst in 2021 and will rise 3.6% year over year to 88.7 MMst in 2022. In 2023,coal exports are expected to improve further by 4.3% to touch 92.5 MMst. Apart from higher steel production, higher international coal prices compared with the U.S.-produced coal and the ongoing military conflict in Ukraine might hamper the supply of coal volumes from Russia to other countries, thereby creating export opportunities for U.S. coal producers.
Yet, the improvement in demand for coal is expected to be short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. The new policy will also aim at lowering greenhouse emissions by 50% to 52% by 2030 from the 2005 levels. Coal industry operators are likely to face difficulties as several electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage.
In this article, we run a comparative analysis on two companies from the Zacks Coal Industry — ARCH Resources (ARCH - Free Report) and Warrior Met Coal (HCC - Free Report) — to decide which stock is a better pick for your portfolio now.
ARCH Resources Corporation has a market capitalization of $2.6 billion, while the same for Warrior Met Coal is $2 billion.
Growth Projections & Surprise History
The Zacks Consensus Estimate for ARCH’s 2022 earnings is pegged at $60.48 on revenues of $3.5 billion. The bottom line reflects a 60.3% rise in the past 60 days.
The Zacks Consensus Estimate for HCC’s 2022 earnings is pegged at $10.64 on revenues of $1.5 billion. The bottom line reflects a 63.2% rise in the past 60 days.
ARCH Resources delivered an average earnings surprise of 15% in the last four quarters, while Warrior Met Coal delivered a negative average earnings surprise of 84.5% in the last four quarters.
Debt-to-Capital Ratio
The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. ARCH and HCC have a debt-to-capital ratio of 45.1% and 30%, respectively, compared with the industry’s 37.1%.
Dividend Yield
Utility companies generally distribute dividends. Currently, the dividend yield for ARCH Resources and Warrior Met Coal is 0.6%. Both the companies’ dividend yields are lower than the Zacks S&P 500 composite’s average of 1.47%.
Return on Equity
Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for ARCH Resources and Warrior Met Coal is 85.2% and 30.6%, respectively. Both the stocks have outperformed the industry’s ROE of 20.8%.
Price Performance
In the past six months, ARCH Resources’ shares have rallied 78.4% compared with the industry's growth of 71.9%. Meanwhile, shares of Warrior Met Coal have rallied 49.9%in the same time frame.
Image Source: Zacks Investment Research
Outcome
Though these companies are efficiently providing high quality coal to their customers, ARCH Resources, with higher ROE and its outperformance over the past six months is a better stock to add to your portfolio.
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ARCH or HCC: Which is a Better Coal Stock for Your Portfolio?
After the easing of pandemic-related restrictions, the global economic recovery in 2021 revived industrial and commercial activities worldwide. The rollout of vaccines and the increasing economic activities are steadily boosting the demand for coal in electricity generation, thereby supporting the hike in coal production. This rebound due to global coal demand boosted the profit levels of coal operators and is expected to continue in the near term.
Coal is valued for its energy content and is used worldwide to generate electricity as well as in steel and cement manufacturing. Per the U.S. Energy Information Administration (EIA), U.S. coal production volumes are expected to increase 5% in 2022 to touch 606 MMst (millions of short tons) and improve further by 3% in 2023 to hit 624.3 MMst.
Coal plays an important role in steel production. The strong demand from steel units and the rising coal exports are continuously boosting the prospects of U.S. coal miners. Per the EIA, coal exports were 85.6 MMst in 2021 and will rise 3.6% year over year to 88.7 MMst in 2022. In 2023,coal exports are expected to improve further by 4.3% to touch 92.5 MMst. Apart from higher steel production, higher international coal prices compared with the U.S.-produced coal and the ongoing military conflict in Ukraine might hamper the supply of coal volumes from Russia to other countries, thereby creating export opportunities for U.S. coal producers.
Yet, the improvement in demand for coal is expected to be short-lived as the new environmental policy will target 100% carbon pollution-free electricity by 2035, which will significantly lower the demand for coal from the U.S. electricity space. The new policy will also aim at lowering greenhouse emissions by 50% to 52% by 2030 from the 2005 levels. Coal industry operators are likely to face difficulties as several electric utilities have decided to become carbon neutral by 2050 and completely cut down coal usage.
In this article, we run a comparative analysis on two companies from the Zacks Coal Industry — ARCH Resources (ARCH - Free Report) and Warrior Met Coal (HCC - Free Report) — to decide which stock is a better pick for your portfolio now.
Both the stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
ARCH Resources Corporation has a market capitalization of $2.6 billion, while the same for Warrior Met Coal is $2 billion.
Growth Projections & Surprise History
The Zacks Consensus Estimate for ARCH’s 2022 earnings is pegged at $60.48 on revenues of $3.5 billion. The bottom line reflects a 60.3% rise in the past 60 days.
The Zacks Consensus Estimate for HCC’s 2022 earnings is pegged at $10.64 on revenues of $1.5 billion. The bottom line reflects a 63.2% rise in the past 60 days.
ARCH Resources delivered an average earnings surprise of 15% in the last four quarters, while Warrior Met Coal delivered a negative average earnings surprise of 84.5% in the last four quarters.
Debt-to-Capital Ratio
The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. ARCH and HCC have a debt-to-capital ratio of 45.1% and 30%, respectively, compared with the industry’s 37.1%.
Dividend Yield
Utility companies generally distribute dividends. Currently, the dividend yield for ARCH Resources and Warrior Met Coal is 0.6%. Both the companies’ dividend yields are lower than the Zacks S&P 500 composite’s average of 1.47%.
Return on Equity
Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for ARCH Resources and Warrior Met Coal is 85.2% and 30.6%, respectively. Both the stocks have outperformed the industry’s ROE of 20.8%.
Price Performance
In the past six months, ARCH Resources’ shares have rallied 78.4% compared with the industry's growth of 71.9%. Meanwhile, shares of Warrior Met Coal have rallied 49.9%in the same time frame.
Image Source: Zacks Investment Research
Outcome
Though these companies are efficiently providing high quality coal to their customers, ARCH Resources, with higher ROE and its outperformance over the past six months is a better stock to add to your portfolio.