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Tickers in this Article: ACI, BTU, MEE, CNX, PCX, BNI, BRK.A
Everybody hates carbon, so everybody hates coal. Or says they do. Coal is dirty and burns with emissions that are unfriendly to our atmosphere; it is black, not green. In this environment, on the heels of a broken economy in the last year, Arch Coal, Inc. (NYSE:ACI) and the other major coal miners and producers reported their third-quarter earnings recently. Arch Coal's revenue and profits fell off substantially from last year's third quarter, so what's to like about Arch or any of the coal companies?

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Earnings In The Pits

Arch Coal reported a net income of $25.2 million or 16 cents a share on $615 million revenue for the quarter, against $97.6 million income or 68 cents a share on $769.5 million revenue in the third quarter last year. Demand with the slow economy continues to be way off, as coal-fired electric power generation for utilities as well as domestic metallurgical coal use for steelmaking has dropped. (These quick-and-dirty ratios will help you find the most undervalued stocks on the market, see 5 Must-Have Metrics For Value Investors.)

Peabody Energy (NYSE:BTU) reported similar depressed earnings; though its burgeoning business in China did well, its U.S. business did not. Massey Energy's (NYSE:MEE) earnings plunged almost 70% year over year, while Consol Energy (NYSE:CNX) was able to keep earnings nearly level from last year's third quarter, partially due to its natural gas business. Patriot Coal (NYSE:PCX), a smaller coal producer than the others, though it had a drop in Q3 earnings, the company reports sequentially rising shipments of metallurgical coal to Asia.

Is The Coal Biz On The Rise?

Massey, Consol, Arch and the others issued cautious industry outlooks, though Patriot's report of the metallurgical coal demand in Asia is a brighter hint on coal's near-term prospects. Long term, Peabody and the others were cited in a Barron's piece on the increased global demand for coal, with Peabody likely to benefit the most due to its growing large presence in Asia.

Caution Flags
There are dark notes on coal, in addition to the current weak U.S. demand and the slow pickup in its pace seen by Arch and the other companies. Green coal or carbon recapture is going to be a long, slow, hard, expensive process. Railroads, which tell much about the state of the coal industry as well as the economy, are still guarded about the pace of economic recovery. But Arch Coal Chairman and CEO Steven Leer pointed out that Arch was still profitable in this awful economy, and "is strongly positioned for the upturn," further adding that Arch and the coal industry has reached the bottom. (For more on the environment and corporate profit, see Can Business Evolve In A Green World?)

A Buffett Boost

Wait, maybe everybody doesn't hate coal. With uber investor Warren Buffett's purchase of Burlington Northern Santa Fe (NYSE:BNI) through his capital deployment company Berkshire Hathaway (NYSE:BRK.A), Buffett has given a massive vote of confidence to the U.S. economy, the railroads and, by extension, the coal industry. This is, however, regarded as an investment that will reap rewards over the next twenty to thirty years, not necessarily tomorrow; it's the quintessential long-term Buffett investment.

The Bottom Line
Arch Coal and the other coal producers are in place to do well when the economy invariably recovers and demand for coal should more fully return. Arch stock, trading now in the low 20s - well-off its five-year high of over $70 a share - will only have to return to a reasonable level of profitability in these next few years to fuel a rising stock price. This makes Arch and the other coal stocks, for a two to five year time-horizon, significantly undervalued. Smart investors don't hate coal. They see its essential usage as part of our economy and invest accordingly.

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