The coal industry has been beaten up by low natural gas prices and a tough regulatory environment over the last few years. With shares of Peabody Energy Corp. (NYSE:BTU) trading around $25.17, is BTU an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
Observers who have turned their eyes overseas for coal-industry growth prospects know that China’s average manufacturing PMI for the past 12 months has been just 49.1, signaling contraction. China’s GDP for 2012 was just 7.5 percent, a far cry from the 9.7 percent seen in 2011. With the boom of the North American natural gas industry (and an unfavorable regulatory environment in the U.S.) many coal companies have looked hopefully across the Pacific.
China’s December manufacturing PMI registered 51.5, indicating growth heading into 2013. HSBC’s chief economist for Greater China commented on the reading: “Such momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise.”
China’s GDP is expected to grow 8.6 percent in 2013 on the back of heavy infrastructure spending, which could also prove to be a boon to struggling coal companies.
E = Equity-to-Debt Ratio is Not Very Attractive
Peabody’s debt-to-equity ratio of 1.07 puts it right in between some of its major competitors. Alpha Natural Resources (NYSE:ANR) clocks in at a relatively attractive 0.59, while Arch Coal (NYSE:ACI) lags behind at 1.45.
It’s also important to consider total debt and total cash on hand, which for Peabody is $6.36 billion in debt and $648 million in cash. Alpha Natural Resources comes to the table with $2.99 billion in total debt and $549.4 million in cash, while Arch Coal carries $4.58 billion in total debt and $650.11 million in cash.