Arch Coal Powers Forward

Green energy is coming. However, we won’t get there overnight.

Transitions in the most developed and richest economies are still decades away, with emerging markets even further.

In between now and then, Arch Resources (ARCH) stands to make a fortune.

Emerging from bankruptcy in 2016, the U.S. coal company is known for its low-cost production and high-quality assets.

Despite heavy investments to move towards renewable resources, even the U.S. still consumes more than half a billion tons of coal every year.

And this stock is incredibly cheap. Like 4.38x forward earnings.

We picked out Arch Resources from our proprietary data because it was the second most searched coal stock by retail traders last month.

Environmental concerns aside, there’s a lot of upside potential with this stock.

Here’s why.

Arch Resources’ Business Model

One of the largest coal producers in the U.S., Arch Resources operates nine mines across the major coal basins in the country.

At the end of 2020, the company had 886.4 million tons of recoverable coal reserves. In that same year, it sold 63 million tons of coal including 0.9 tons purchased by third parties.

In early January 2016, the company reorganized under Chapter 11 Bankruptcy, emerging in October of that year.

The company operates two reportable business segments: metallurgical and thermal coal.

On December 31, 2020, the company sold the Viper operation, which had been part of the Other Thermal Segment.

Metallurgical coal contributed $295 million in sales on 1,980 tons in Q3 with Thermal adding $299 million in sales on 19,025 tons in that same quarter.

Financials

Rather than taking an extremely long view, we want to look at the more recent results from the company.

As you can see, metallurgical coal’s price surged while thermal remained relatively stagnant.

This helped the company earn more in Q3 than nearly any other quarter.

And we don’t believe these prices are set to decline anytime soon.

You can see from the chart below that coal inventories are at some of the lowest levels in years.

With China curtailing its own production, we see even more pressure on coal stocks.

Yes, many countries are actively moving towards green energy. However, that takes time.

And as you’ll see in the valuations below, the current cash generation and earnings can pay out huge in the interim.

We also want to point out that Arch doesn’t carry as much debt as you might expect with $416 million in long-term debt, which although higher than recent years is still quite manageable.

Valuation

We think that one of the most compelling points in favor of Arch Resources comes from its valuation metrics.

Specifically, the forward P/E and price to cash flow ratios are just incredible.

Since we expect coal prices to remain elevated for a few years, the amount of cash thrown off by the company could pay for the stock in less than four years.

Compared to the rest of the energy sector, which has done rather well this year, Arch still looks cheap in many regards.

True, it didn’t hit great P/E and price to cash flow ratios over the last 12 months. That’s in large part due to metallurgical coal prices rising in Q3.

It’s also a big reason we think many investors will miss this company on their scans.

Our Opinion – 9/10

We like the stock’s valuation and storyline. 

What would make us change our mind?

If coal stocks increased and metallurgical spot prices started to decrease. Until then, we see more upside for the company.