Is Coal’s December Rally Losing Steam?

Shares of Peabody Energy Corp. (NYSE:BTU) dropped as much as 4.5 percent to about $26.40 per share on Monday afternoon after analysts at Citigroup lowered their price target on the stock from $33 to $32 per share. While December has generally been a good month for coal stocks, Alpha Natural Resources, Inc. (NYSE:ANR), Walter Energy, Inc. (NYSE:WLT) and Arch Coal Inc. (NYSE:ACI) all also dropped in afternoon trading.

Is the December Rally Losing Steam?

Shares of Peabody have come up 11.6 percent since the first day of trading in December. Alpha Natural Resources has come up 32.4 percent, Walter Energy has gained 25.2 percent, and Arch Coal climbed 15.3 percent so far this month. The Market Vectors Coal ETF (NYSE:KOL) gained 7.3 percent for the period.

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This type of upswing isn’t uncommon in the coal industry, and in many ways is expected. Shares across the industry tumbled in November, catalyzed in no small part by the results of the presidential election, and most stocks haven’t yet returned to pre-election levels.

That being said, pre-election prices were fueled by political speculation, with many investors hoping a Republican in the White House would ease some of the regulatory burden facing the coal industry. This year to date, the coal ETF is down over 26 percent, reflecting the same type of decline seen in coal stocks across the board. Coal stocks just haven’t been able to get back on their feet after being knocked over coming out of 2011.

There’s a lot of disagreement and uncertainty in the industry right now, but Citigroup maintains a “Buy” rating on Peabody. The tweaked reiteration came just a few days after Peabody issued its own first-quarter 2013 outlook.

Expenses in Australia are expected to increase, but so are sales in the region. While some stabilization in natural gas prices plays to Peabody’s benefit, lower realized metallurgical coal pricing is expected to weigh earnings down. Citigroup lowered its 2013 EPS estimate from $1.90 to $0.75.

The dip seems to be more about pessimism regarding the first quarter and not the long-term prospects of the coal industry. As Peabody chairman and CEO Gregory Boyce said in a statement: “We are seeing increased U.S. gas-to-coal switching given higher natural gas prices, and global seaborne coal markets are showing signs of improving next year. While the first quarter is challenged due to a combination of factors, we expect quarter-over-quarter improvement throughout the remainder of the year.”

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