Arch Coal (NYSE:ACI) posted a strong second quarter with substantial increases in revenue and earnings.This marks a contrast from its year ago quarter, as the company continues its rebound from a difficult 2009.The coal industry has been picking up momentum this year and the company increased its guidance accordingly.
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Improved Coal Markets, Improved Results
Stronger global and domestic market fundamentals drove the success of Arch's quarter. Revenue rose to $764.3 million from $554.6 million in the quarter a year ago. Conditions for thermal coal used by utilities have improved. Electricity generation has grown by 4% this year, with demand accelerating during the second quarter. Stockpiles of coal for electricity generation have declined and are expected to continue to decline.
The company was able to take advantage of higher pricing for coal while it executed effective cost controls. Total operating margin per ton was up to $2.69 from 69 cents in the year ago quarter. On the strength of these factors, net income rose to $66.2 million, or 41 cents a share, from last year's second quarter loss of $15.1 million, or negative 11 cents a share.
Coal Emerges From The Pits
Steven F. Leer, Arch Coal's CEO, commented that "coal markets have improved considerably since this time last year, but remain well below the levels of the bull market of 2008." (To learn more, see Riding The Bear Into A Bull Market.)
Indeed, leading coal producer Peabody Energy (NYSE:BTU) reported excellent second quarter results on July 20. Quarterly earnings increased from 50 cents per share to 69 cents, while revenue was up 24%. Peabody's strong global position in the industry, particularly its Asian presence, gives it tremendous growth potential long term.
Operational Issues Spoil Results
By contrast, Massey Energy (NYSE:MEE) has been struggling due to effects of the blast at its Upper Big Branch mine. Its posted an adjusted loss of 2 cents per share for the second quarter, despite a revenue increase of 16%. Consol Energy (NYSE:CNX) faced acquisition costs and higher-than-expected mining costs that dampened profits to an adjusted 45 cents per share, compared with 62 cents EPS in the second quarter last year. Revenue, however, increased by 20% to $1.3 billion. The large Appalachian coal and natural gas company still gave encouraging guidance on production and costs for the rest of the year.
Macro-Coal Picture
Standard & Poor's (S&P) recently lowered its outlook on utility Duke Energy (NYSE:DUK), due to the high-cost of the utility completing a new "environmentally friendly" coal plant. Though the impact on Duke Energy's earnings may be negative with the cost escalation, as well as strong utility competition, the plant construction underscores that coal is still a viable industry. Coal is very much in the future picture for domestic electricity production. Also, the global demand for coal in Asia not only remains strong, but will become a driving force for the coal business for decades - not just a few years.
Arch Coal A Player
Arch Coal has a strong presence domestically and will continue to have its share of the global seaborne coal trade.The company has emerged from its own dark year in 2009, and is running well. It should continue to grow. Along with Peabody Energy, this is once again be a good stock to consider owning.
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