With shares of Arch Coal (NYSE:ACI) trading around $7.65, is the company an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalysts for the Stock’s Movement
Observers who have turned their eyes overseas for coal-industry growth prospects know that China’s average manufacturing PMI for the past 12 months has been just 49.1, signaling a contraction. China’s GDP for 2012 was just 7.5 percent, a far cry from the 9.7 percent seen in 2011. With the boom of the North American natural gas industry (and an unfavorable regulatory environment in the U.S.) many coal companies have looked hopefully across the Pacific.
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China’s December manufacturing PMI registered 51.5, indicating growth heading into 2013. HSBC’s chief economist for Greater China commented on the reading: “Such momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise.”
E = Equity-to-Debt Ratio is Not Close to Zero
Arch Coal’s debt-to-equity ratio of 1.45 puts it at the bottom of the pile when compared against its competitors. Peabody Energy (NYSE:BTU) clocks in at 1.07, while Alpha Natural Resources (NYSE:ANR) looks relatively attractive at just 0.59.
It’s also important to consider total debt and total cash on hand, which for Arch Coal is $4.58 billion in debt and $650.11 million in cash. Peabody has $6.36 billion in debt and $648 million in cash, while Alpha has $2.99 billion in debt and $549.4 million in cash.