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Lehman Brothers upgraded Arch Coal (ACI
) to strong buy.
Analyst Peter Ward says weak sentiment towards the energy sector has driven shares down. Among many investors, there exists perception of a tight correlation between natural gas and price/coal fundamentals. Empirically, the correlation is much weaker than many would suspect. Even after recent coal price increases, the delivered cost of coal per million British Thermal Unit is about $1.50. Unless the price of gas falls substantially below $2.00 per million British Thermal Unit, Ward's bullish thesis on coal volumes and prices will remain intact. Given the recent success in negotitating higher priced long-term contracts, Ward raised the $2.00 2002 EPS estimate to $2.39, and raised the 2003 estimate to $2.65. He has a $42 target.