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Arch Coal: Value Trap Or Value Play? [PART 1]

Arch Coal Inc (ACI) currently looks to be a contrarian value play in an unloved industry, but is the company a value trap? In this three part series, I’m going to take a look at both sides of the argument for and against the company’s s uitability as a value play and attempt to arrive at a suitable conclusion.

Arch Coal

Argument in favor of Arch Coal

Let’s start with the argument in favor of Arch Coal Inc (ACI) as a value investment.

Why does Arch look attractive? Well, the company is cheap. In particular, at the end of the company’s fiscal third quarter, book-value-per-share stood at $12.06 and tangible book-value-per-share stood at $10.52. At present levels this indicates that Arch is trading at a tangible-book-value-per-share of 0.39 and a book-value-per share of 0.34.

That being said, Arch Coal Inc (ACI) has not reported a profit for the last 12 months.

Still, Arch’s level of debt is not worrying and the company has plenty of headroom to fund a turnaround. At the end of the company’s third quarter, Arch reported total debt of $5.1 billion and cash of $1.4 billion; net debt of $3.7 billion. With total assets of $9.5 billion this gives Arch a net-debt-to-asset ratio of 39%.

However, this debt pile comes with a quarterly interest bill of approximately $95 million, which the company has not been able to cover with EBITDA for the last three quarters. What’s more, Arch has a net-debt-to-TTM-EBITDA ratio of 10.2x.

Nevertheless, the company remains liquid with total liquidity of $1.6 billion at the end of the third quarter, $1.4 billion of which was cash and equivalents, $450 million is restricted cash tied a portion of the company’s senior debt. The company has no debt maturities to cover until August 2016.

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