NEW YORK (TheStreet) -- Arch Coal (ACI) shares are up 2.6% to $5.14 in pre-market trading on Monday.
The pre-market bump follows the coal producer's stock being upgraded to "neutral" from "sell" by analysts at Goldman Sachs (GS) today. The firm raised its price target to $5 from $3.
The upgrade is a result of a rosier outlook for coal producers operating in the Powder River Basin (PRB) region of Wyoming and Montana. "No other coal deposit on the planet is so big, so close to the surface, and so cheap to mine as the rich seams in eastern Wyoming and southern Montana," according to the Daily Climate.
Despite the rosier outlook, Goldman Sachs thinks there are better options in the sector.
"We still remain concerned about high leverage levels for ACI, its premium relative valuation and the met exposure. For investors seeking exposure to a recovery in the PRB, we prefer Buy-rated Peabody Energy Corp (BTU) as well as Neutral-rated Cloud Peak Energy (CLD), where we see greater upside to our 6-month price targets."
Separately, TheStreet Ratings team rates ARCH COAL INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate ARCH COAL INC (ACI) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, poor profit margins, weak operating cash flow, unimpressive growth in net income and generally high debt management risk."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, ARCH COAL INC's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for ARCH COAL INC is currently extremely low, coming in at 7.08%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -51.60% is significantly below that of the industry average.
- Net operating cash flow has significantly decreased to -$130.85 million or 454.66% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- The debt-to-equity ratio is very high at 2.29 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Despite the company's weak debt-to-equity ratio, the company has managed to keep a very strong quick ratio of 2.85, which shows the ability to cover short-term cash needs.
- The change in net income from the same quarter one year ago has exceeded that of the Oil, Gas & Consumable Fuels industry average, but is less than that of the S&P 500. The net income has significantly decreased by 25.6% when compared to the same quarter one year ago, falling from -$295.42 million to -$371.21 million.
- You can view the full analysis from the report here: ACI Ratings Report