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Analyst expects Arch Coal earnings miss but urges focus on outlook

FBR & Co. analyst Lucas Pipes predicts that Arch Coal Inc. will miss earnings expectations for the fourth quarter of 2016 but urges investors to focus on the outlook for his favorite stock in the mining sector.

In a Feb. 1 note, Pipes claimed Arch's valuation is "unreasonably cheap" and opined that the fourth-quarter results expected Feb. 8 will be an opportunity for the company to "set the record straight." He said exposure to top-tier metallurgical coal and thermal coal assets, multiple catalysts and a compelling valuation all make the case for investing in Arch.

"We estimate that ARCH is trading at 4.1x 2017 EV/EBITDA and 4.8x 2018 EBITDA," Pipes wrote. "This compares to the peer group at 5.0x and 6.5x, respectively. In our opinion, this discount does not make any sense in light of the company's high-quality mine portfolio, exposure to higher met coal and thermal coal prices, and clean balance sheet."

Still, the note stated, FBR is now estimating EBITDA of $78 million in the recent quarter versus consensus estimates of $93 million, reflecting a more conservative estimate of open metallurgical coal tonnage. Pipes wrote that U.S. Mine Safety and Health Administration data shows production from Arch's metallurgical coal mines was toward the lower end of the company's guidance.

The note said FBR expects that Arch's earnings will start to reflect a sharp increase in metallurgical coal prices in the first quarter of 2017. FBR maintained an outperform rating on Arch.

"We believe that the company offers attractive exposure to a met coal market that has been experiencing sharp price improvements," Pipes said. "We view the company as a low-cost producer with high-quality operating assets in both met and thermal coal."