Foundation Coal Reverses Coal Sector Gains (FCL, BTU, ACI, KOL)

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On Monday, Peabody Energy (NYSE:BTU) announced strong first quarter results: 15% increase in revenue to a record $1.28 billion and EPS from continuing operations of $0.26. Peabody raised its full-year target by $500 million, and its EPS from continuing operations to $2.20 – $3.00. This boosted the whole coal industry by about 4%.

On Tuesday, Arch Coal (NYSE:ACI) announced a 22% increase over 2007 in first quarter revenue to $699.4 million, and EPS of $0.56, compared with $0.20 in 2007. The company raised its guidance for 2008 EBITDA to $745 – $845 million, and its EPS expectations to $2.40 – $2.80. That gave back the industry’s previous day’s gain.

But… Maybe not all good things run in three’s.  Today, Foundation Coal (NYSE:FCL) announced a clear miss on its report of $0.13 EPS, and excluding items the number was $0.19 EPS. While this was down from $0.53 last year, First Call estimates were $0.32 EPS. Revenue of $406.9 million exceeded estimates averaging $403.49 million, and improved on 2007 first quarter revenue of $386.2 million. The company did not change its guidance for the remainder of 2008.

Foundation’s net income for the first quarter of 2008 totaled $6.1 million, compared with $24.6 million a year ago. What happened? Higher diesel fuel costs, higher royalty payments, and higher labor costs accounted for a $17 million increase in the cost of sales. Another $14 million was attributed to a botched arbitrage transaction in which FCL had to buy about 300,000 tons of coal to meet existing commitments, expecting to sell new production on the spot market at a higher price. It didn’t work out that way.

FCL stock was down $1.64 in pre-open trading, and shares are down slightly more at $61.91 after 45 minutes of trading. Peabody has fallen by 3.7% to $66.01, and Arch (ACI) is down 1.5% at $58.15 so far. What goes up doesn’t always stay up.

What is evident is that the coal industry is not necessarily a series of unified parts.  Transportation costs can impact results, equipment shortages and accidents can impair companies, and we’ve even seen inability to transport materials out of the line affect coal shares in recent years.

To show how the overall sector is doing, the key ETF for the group is the Market Vectors Market Vectors Coal ETF (NYSE: KOL).  It has many international components in it, with five of the top ten components being outside the U.S.  To prove that, this ETF is actually UP by 0.5% at $45.50 on somewhat thin trading volume.  This ETF has just not yet caught on with investors.

Paul Ausick
April 23, 2008