Arch Resources Inc (ARCH, Financial) has seen a daily loss of -15.81%, but over the past three months, it has gained 36.08%. With an Earnings Per Share (EPS) of 45.92, the question that arises is: Is the stock modestly overvalued? This article aims to answer that question through a detailed valuation analysis. Read on to understand the financial strength, profitability, and growth of Arch Resources.
Company Introduction
Arch Resources Inc is a leading producer of metallurgical and coking coal, selling its products to power plants, steel mills, and industrial facilities. Its primary revenue comes from the Metallurgical (MET) segment, with a significant portion of its revenue derived from Asia. With the current stock price standing at $143.68, it surpasses the company's GF Value of $117.82, indicating that the stock may be modestly overvalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $143.68 per share, Arch Resources (ARCH, Financial) has a market cap of $2.60 billion, and the stock is estimated to be modestly overvalued. Therefore, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Arch Resources boasts a cash-to-debt ratio of 1.73, ranking better than 73.76% of 587 companies in the Steel industry. Its overall financial strength is 9 out of 10, indicating strong financial health.
Profitability and Growth
Companies with consistent profitability over the long term offer less risk for investors. Arch Resources has been profitable 6 out of the past 10 years. Over the past twelve months, the company had a revenue of $3.40 billion and an Earnings Per Share (EPS) of $45.92. Its operating margin is 21.29%, which ranks better than 93.7% of 603 companies in the Steel industry. Overall, the profitability of Arch Resources is ranked 6 out of 10, indicating fair profitability.
Growth is a crucial factor in the valuation of a company. Arch Resources's 3-year average revenue growth rate is worse than 53.07% of 586 companies in the Steel industry. However, its 3-year average EBITDA growth rate is 41%, ranking better than 74.66% of 509 companies in the Steel industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Arch Resources's return on invested capital is 49.73, and its cost of capital is 6.4.
Conclusion
Based on our analysis, the stock of Arch Resources (ARCH, Financial) is estimated to be modestly overvalued. The company's financial condition is strong, and its profitability is fair. Its growth ranks better than 74.66% of 509 companies in the Steel industry. To learn more about Arch Resources stock, you can check out its 30-Year Financials here.
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