We are maintaining our Buy recommendation on Arch Coal (ACI). Even though the global economy looks to be weak in 2009, the fundamentals driving the strength of coal prices remain.

Arch Coal posted better than expected third quarter earnings of $98MM or $0.68 per share, beating our Q3'08 estimate of $0.64 per share. Earnings per share increased more than 250% year-over-year and were down slightly sequentially due to a less favorable mix of shipments and the effects of a longwall move in Arch's Western Bituminous operations. Revenues of $769 MM were up 28% from Q3 07 led by a 27% increase in average realized price per ton.

Arch's significant unpriced positions in '09/'10 give it leverage to both domestic and export markets allowing the company to achieve substantial margin expansion and earnings growth. The financial crisis will not impact ACI operationally in 2009 as the company has an impressive cash flow generating ability and a strong balance sheet.

The massive pullback across coal stocks has been overdone and represents a buying opportunity. Due to our updated pricing and production assumptions, we have lowered our target price from $81 to $60 per share.