Peabody Energy Corporation (BTU), Alpha Natural Resources, Inc. (ANR): Is Arch Coal Inc (ACI) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Arch Coal Inc (NYSE:ACI) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Arch Coal Inc (NYSE:ACI)’s story, and we’ll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Arch Coal Inc (NYSE:ACI)’s key statistics:

ACI Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	29.5%	Fail
Improving profit margin	(432.3%)	Fail
Free cash flow growth > Net income growth	(138.1%) vs. (530.3%)	Pass
Improving EPS	(431.9%)	Fail
Stock growth (+ 15%) < EPS growth	(74%) vs. (431.9%)	Fail

Source: YCharts. * Period begins at end of Q2 2010.

ACI Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(400.9%)	Fail
Declining debt to equity	127%	Fail
Dividend growth > 25%	(70%)	Fail
Free cash flow payout ratio < 50%	Negative FCF	Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going
Arch Coal Inc (NYSE:ACI) is more than a little smudged today. The miner’s mustered only one out of nine possible passing grades. Although it missed slightly on revenue analysis, Arch Coal’s single passing grade was granted more on a technicality than a genuine improvement. In addition, Arch Coal Inc (NYSE:ACI)’s free cash flow has fallen into negative territory, and it may not be able to support even its reduced distributions if the trend continues. Will Arch Coal be able to move past this weakness and rebound, or is the coal miner going to be tarnished for some time to come? Let’s dig a little deeper to find out.