First Look at Arch Coal (ACI). Stock price -75% over past 52 weeks. Should you buy?

Bonds: $9.0 billion outstanding.  The bonds are a threat to the common dividend.

Times interest earned:  Arch Coal paid $230 million on interest charges in 2011.  They earned $142 million net income in 2011.  This is troubling.  They only earned 0.62 times their interest expenses.  The father of value investing, Benjamin Graham, likes to see a company earn at least four times their fixed charges (interest expenses).  All of these bonds are ahead of the common dividend.

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Preferred stock: none.

DIVIDEND RECORD: Arch Coal cut their quarterly dividend by 50% in late 1999 from $0.06 to $0.03.  They have grown it back to $0.11 since late 1999.

Dividend: $0.11 quarterly

Dividend yield: 4.5% ($0.44 annual dividend / $9.76 share price)

Dividend payout: 58.6% ($0.44 / $0.75 2011 EPS) –OR- 56% ($0.44 / $0.79 average adjusted earning power)

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EARNING POWER: $0.79 per share @ 213.29 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$0.18

$38 M

129 M

$0.18

2006

$1.80

$261 M

145 M

$1.22

2007

$1.21

$175 M

144 M

$0.82

2008

$2.45

$354 M

144 M

$1.66

2009

$0.28

$42 M

151 M

$0.20

2010

$0.97

$159 M

163 M

$0.75

2011

$0.74

$142 M

191 M

$0.67

Seven year average adjusted earnings per share is $0.79

Consider contrarian buying below $6.32 (8 times average adjusted EPS)

Consider value buying below $9.48 (12 times average adjusted EPS)

Arch Coal (ACI) is currently trading at 12.4 times average adjusted EPS.  This is stock is priced for investment.  It isn’t as cheap as the happy faced articles portray.

Consider speculative selling above $15.80 (20 times average adjusted EPS)

BALANCE SHEET – The price to book and tangible book values look great.  But the company has little current assets to pay its current liabilities.  The overall balance sheet is not strong.

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Book value per share: $16.78 ($3,578 M equity / 213.29 M shares)

Price to book value ratio: 0.58 (under 1.0 is good)

Tangible book value per share: $13.98

Price to tangible book value: 0.70 (under 1.0 is really good)

Current ratio: 1.16 latest quarter (over 2.0 is good) ($1,183 M current assets / $1,021 M current liabilities)

Quick ratio: 0.14 latest quarter (over 1.0 is good) Horrible!! No cash!  ($138 M cash or equivalents/ $1,021 M current liabilities)

Debt to equity ratio: 1.05 (lower is better)  Too much debt to equity.

Percentage of total assets in plant, property, and equipment: 77.8% (the higher the better).  Current assets = 11.58%, intangibles = 5.84%, and other long term assets = 4.76%

Working capital trend: Their trend is certainly not up, but at least 90% of the last 10 years are positive numbers.

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CONCLUSION – Arch Coal is cheaper not than during the Panic of 2008 – 2009.  It has lost over 75% of its share price in the last 52 weeks, but that doesn’t mean you should buy it.  The dividend is 4.5%, but it is not safe due to the bonds.  They have cut the dividend drastically in the past and I see no reason why they wouldn’t do that again in the future.  Coals main competitor, natural gas, is extremely cheap.  That will inhibit earnings growth in the coal industry until the price of natural gas goes much higher.  Arch coal’s share price is currently flirting with value territory of less than 12 times average adjusted earning power.  I think poor commodity fundamentals and a worldwide double dip recession are going to sink this stock further.  The weak balance sheet real is a deal breakers.  They are going to have to sell more shares in a secondary offering or take on more debt to pay for their current liabilities.  I think that Arch Coal should not be bought until they strengthen their balance sheet by paying of debts.

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DISCLOSURE – I don’t own Arch Coal (ACI).

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Published in: on April 30, 2012 at 1:41 pm  Leave a Comment  

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