TPS Trade Alert – January 7, 2015
Recommendation:
Buy Arch Coal (NYSE: ACI) up to $1.65 per share.
Trade Rationale:
We’re going to kick off 2015 by adding a coal stock to our portfolio. Wait, what? Isn’t coal supposed to be dead?
Okay, so coal is most likely never again going to be the dominant source of energy in the US. It’s simply too dirty and bad for the environment (and natural gas is now abundantly available in the US).
However, coal is still an important form of energy production. It’s cheap and plentiful. Until renewable forms of energy become cheaper and more efficient, there’s going to be a need for coal (and oil and natural gas for that matter).
Fortunately, advances are rapidly being made in coal technology. In other words, technology is being developed which can make coal a much cleaner form of energy and reduce emissions.
What’s more, coal can also be converted to natural gas and hydrogen. Those are both important sources of fuel. And, coal can even be liquefied to become a transportation fuel.
If these processes can be advanced to the point where they are relatively clean and efficient, it makes coal even a more important part of our energy future.
And that’s not all…
Coal has been so out of favor in recent years, coal stocks are ridiculously cheap. At this point, it simply isn’t that risky to bet on coal, because most of the damage has been done.
Take Arch Coal (NYSE: ACI) for example.
ACI produces both thermal and metallurgical coal from surface and underground mines in the US. The company has proven and probable reserves of roughly 5.3 billion tons.
First off, that’s a lot of coal. There’s no way to deny ACI is sitting on a massive amount of assets. Secondly, a percentage of the coal is metallurgical coal. Keep in mind, coal is a key ingredient in steel.
As such, even if thermal coal (used for power generation) isn’t in high demand, metallurgical coal may be.
But here’s the thing…
Arch management is well aware of the negative environmental aspects of coal and has taken steps to improve their positioning. For instance, the company has a leading position in three major US low-sulfur coal basins.
What’s more, the company has been active in developing former mine lands into something economically productive. One site became a wood products industrial park, while another became a golf course, for example.
Ultimately though, what makes ACI attractive is its financials and valuation.
The company does just under $3 billion a year in annual sales. Yet, ACI has a mere $316 million market cap. Yes, the company has $5.1 billion in debt, but also over $1 billion in cash. In other words, revenues plus cash should be more than adequate to service the debt load.
Given those extreme revenue and asset numbers, it’s no surprise how attractive ACI is from a valuation standpoint. The shares are trading at just 0.12x sales and 0.18x book value.
Basically, if the company were to declare bankruptcy tomorrow and sell off its parts, shareholders would stand to make 5x what they paid for it today.
Despite the fall of the coal industry, there’s still reason to scoop up shares of ACI while it’s trading at dirt cheap levels.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Arch Coal |
| Ticker: | ACI |
| Recent Price: | $1.49 |
| Buy Up To Price: | $1.65 |
| Market Cap: | $316 million |
| Avg. Daily Volume: | 8,342,240 shares |
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Category: TPS Trade Alert
