Does Peabody Have Potential?

With shares of Peabody Energy Corp. (NYSE:BTU) trading at around $20.18, is BTU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Coal demand is likely to increase in China and India, and Peabody is poised to benefit in a big way from this expected demand. Peabody is heavily exposed to China and India compared to peers. However, Peabody’s reach goes much further. Peabody provides coal to 30 countries, and it has nine billion tons of proven coal reserves. Capital expenditures are being cut in a massive way and margins are improving. So far, this looks like a good situation, but there are risks.

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The coal industry is now about exports. The domestic market is weak for many reasons, including the rise of natural gas and government regulations. Coal releases almost twice as many emissions as natural gas, which is why the Environmental Protection Agency will require that coal be as clean as natural gas. Mindboggling, isn’t it? This would be quite a feat. The new rule is scheduled to go into effect in January of 2015, but the coal industry will fight hard against it. One major point will be made, which is that loosening restrictions on coal would have the potential to lead to as many as 200,000 jobs in Central Appalachia. However, this would also harm the environment. So, it basically comes down to the economy versus the environment.

As far as exports go, coal is much easier to transport than natural gas. Therefore, its new role as export giant has the potential to be sustainable. The one major concern is China wanting to improve pollution, but we’ll believe that when we see it.

There is one other rarely discussed wildcard at play here. If we were to be revisited by another recession and natural gas prices were high, coal would become popular once again. Is this a likely scenario? No. But it’s still a possibility and something to ponder.

The chart below compares fundamentals for Peabody, Alpha Natural Resources (NYSE:ANR), and Arch Coal Inc. (NYSE:ACI). Peabody is the largest company of the three with a market cap of $5.44 billion. Alpha Natural Resources has a market cap of $1.65 billion. Arch Coal has a market cap of $1.06 billion.

BTU

ANR

ACI

Trailing   P/E

N/A

N/A

N/A

Forward   P/E

10.99

N/A

N/A

Profit   Margin

-7.25%

-34.94%

-16.74%

ROE

-9.01%

-39.49%

-21.22%

Operating   Cash Flow

$1.52 Billion

$518.42 Million

$332.80 Million

Dividend   Yield

1.60%

N/A

2.20%

Short   Position

4.30%

14.70%

14.50%

 

In some cases, comparing short positions between peers can offer a lot of information. In this case, it’s evident that investors feel Peabody is the least risky investment of the three companies listed above. Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal    

The debt-to-equity ratio for Peabody is higher than the industry of 0.70, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

BTU

1.27

$563.60 Million

$6.25 Billion

ANR

0.68

$1.04 Billion

$3.39 Billion

ACI

1.79

$1.02 Billion

$5.12 Million

 

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T = Technicals on the Stock Chart Are Weak

Peabody hasn’t performed well over the past three years, but based on the numbers below, at least it could have been worse.

1 Month

Year-To-Date

1 Year

3 Year

BTU

-1.94%

-23.98%

-28.88%

-54.84%

ANR

-4.95%

-25.05%

-50.31%

-85.82%

ACI

0.61%

-32.28%

-51.07%

-77.61%

 

At $20.18, Peabody is trading below all its averages.

50-Day   SMA

22.98

100-Day   SMA

24.55

200-Day   SMA

24.01

 

E = Earnings Have Been Unimpressive                

The bad news is that earnings have weakened. However, many people are overlooking the fact that revenue has consistently improved on an annual basis. This is a good sign.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

6.56

5.85

6.67

7.90

8.08

Diluted   EPS ($)

3.50

1.66

2.84

3.52

-2.19

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and earnings. This is a negative, but paying too much attention to quarterly results is never a good idea.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

2.19

2.04

2.00

2.06

1.98

Diluted   EPS ($)

0.82

0.63

0.75

0.16

-3.73

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This is simply a case of domestic weakness versus international strength. As mentioned earlier, problems with the domestic market include the rise of natural gas and increasing government regulations.

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Conclusion

International potential is excellent for Peabody, but the economy is a big concern. If the economy happens to falter, so will the demand for coal. On the other hand, if the economy grows, then Peabody is poised for success. A lot of people are paying attention to the coal market specifically, but global economic conditions are the most important factor right now.

All factors considered, Peabody is a WAIT AND SEE.

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