Arch Coal Inc (ACI): Would the Sale of Assets Help This Coal Stock?

Alpha Natural Resources, Inc. (NYSE:ANR), which is down 45% this year, has less debt. The company owes $3.3 billion in long-term debt. However, it reported a $130 million loss from operations in the first quarter. The company is projected to report losses during the next two years. Alpha Natural Resources had $610 million in cash at the end of the first quarter. The liquidity situation is still satisfactory, but the company can follow Arch Coal Inc (NYSE:ACI)’s example.

Is there light at the end of the tunnel?

Peabody Energy Corporation (NYSE:BTU)’s CEO Gregory Boyce has stated that he sees global coal demand rising by 1.4 billion metric tons over the next five years. Currently, global demand for coal stands at about 8 billion tons a year, so Mr. Boyce is predicting a 17.5% rise in demand. According to him, India would play a key role in the rise of the demand. While all eyes are on China and its slowdown, the Indian government has stated that it is moving to boost coal imports and electricity-generating capacity to deal with the lack of electric power.

For the coal companies to succeed, this projected rise in demand must turn into higher coal prices. There are limits to cost-cutting and they would soon be reached. The companies are selling at attractive P/Bs: Arch Coal Inc (NYSE:ACI) at 0.28, Alpha Natural Resources, Inc. (NYSE:ANR) at 0.24, and Peabody Energy Corporation (NYSE:BTU) at 0.81. The fact that Peabody makes money from its operations while losing on interest expense makes it trade at a premium to the two other stocks.

Bottom line

Whether you believe in the Indian story or not, coal stocks are a risky place to be at this moment. They are highly indebted and may be forced into selling some non-core assets. Analysts paint optimistic target prices for them. Arch Coal Inc (NYSE:ACI) has a $5.68 mean target price, a 54% upside. Alpha Natural Resources, Inc. (NYSE:ANR) has a $9.19 target price, a 72% upside. Peabody Energy Corporation (NYSE:BTU)’s target is $25.79, upside of 74%. However, things can easily get worse before they get better.

Proceed with caution.

The article Would the Sale of Assets Help This Coal Stock? originally appeared on Fool.com.

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