Is This Coal Industry Leader Strong Enough to Invest In?

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) now trading around $25.38, is BTU a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Technicals on the Stock Chart are Weak

As of November 13, the stock price is 3.85 percent below its 20-day simple moving average, or SMA; 5.64 percent above its 50-day SMA; and 1.5 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in a downward trend, losing 30 percent of its value this year to date, and 36.3 percent year over year.Dirty Money

For comparison, Arch Coal Inc. (NYSE:ACI) has dropped 56.7 percent this year to date, while CONSOL Energy Inc. (NYSE:CNX) has dropped 17.3 percent this year to date.

Peabody Energy is trading in a 52-week range between $18.78 and $40.97.

E = Earnings are Increasing Quarter over Quarter

Both the company’s earnings and revenue have a positive trend over the past few years, despite the coal industry being slammed by cheap natural gas. When compared to other players in the industry, Peabody’s numbers look like the result of smart businesses in hard times. Neither Arch Coal nor CONSOL Energy can boast three consecutive years of earnings growth.

2007 2008 2009 2010 2011
Revenue ($) in millions 4,545 6,561 6,012 6,740 7,974
Diluted EPS ($) 0.98 3.52 1.68 2.85 3.52

 

Peabody issued full-year adjusted EPS guidance of $2.10 to $2.30 per share, while analysts are expecting about $2.00 per share on average.

At a glance it’s easy to see that Peabody had a comparatively weak third quarter, but strength is in the eye of the beholder. Revenues still increased, largely thanks to ongoing operations in Australia, the company’s second home. Australian revenues were up 20 percent.

Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 2,036 2,186 2,039 1,998 2,059
Diluted EPS ($) 1.01 0.82 0.64 0.75 0.16

(EPS is non-adjusted, attributable to common shareholders.)

Analysts are expecting earnings of $0.28 per share for the current quarter.

T = Trends Support the Industry in which the Company OperatesCoal Mining

The Union of Concerned Scientists recently released a report arguing that 353 coal-fired power generators (representing 31 percent of coal-fired generators, 18 percent of the coal-generating capacity, and 6 percent of the nation’s total power capacity) were “ripe for retirement and should be considered for closure.”

Mounting competition from alternatives such as solar was cited along with the general trend toward more environmentally friendly energy practices in the United States. However, stabilization in natural gas prices (i.e. an increase to about $3.76/mmbtu as of November 14) plays favorably for North American coal in the short to intermediate future. Coal is competitive against this natural gas price level.

However, the U.S. Government Accountability Office issued a report that suggests EPA regulations could shut down as much as 12 percent of America’s coal-fired energy capacity. The effects of regulation have been downplayed in light of overriding economic concerns, but the regulatory environment can’t be neglected as a factor negatively impacting the industry.

Conclusion

Peabody’s strong position in Australia is a leading factor in any bullish case for the company. In the face of natural gas production, American coal consumption is never likely to recover to the levels seen a few years ago. While coal will continue to remain an important part of the North American energy mix, increasing energy demands for developed countries will be satisfied with more efficiencies and renewable energies. Growth in coal demand will be seen overseas, particularly in India and China. Production capacity in Australia means more economical transportation and a leg up on U.S. exports.

In the political arena, President Barack Obama is not looking to kill coal, but he’s not looking to extend it a gracious hand, either. The regulatory environment currently plays against growth in the American market, but even if the election had turned out differently the reality in the United States is that the future for coal is in exports.

At the end of the day, Peabody looks like a Wait and See for investors looking to put their money to work immediately. While the company is in a relatively strong position in its industry, there is too much uncertainty. Long-term investors who agree with the idea that a global economic recovery will lead to an increase in coal demand from countries like India and China may want to look at Peabody as an outperform given its smart management, but the industry outlook still remains relatively weak.

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