Will Peabody Energy Turn Up the Heat in 2013?

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:

C = Catalysts for the Stock’s MovementCoal Mining

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.

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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.

T = Technicals on the Stock Chart Are Dubious

As of January 11, Peabody’s stock price was 5.74 percent below its 20-day simple moving average, or SMA; 4.62 percent below its 50-day SMA; and 0.40 percent above its 200-day SMA.

Since the beginning of 2013 the stock price has been in a downward trend, falling 5.41 percent this year to date. The stock is down 29.30 percent year over year.

As a benchmark, the S&P 500 has risen 3.22 percent year to date and 14.19 percent year-over-year.

As you can see, there was a tremendous increase in trading activity leading into and immediately after the presidential election.

T = Trends Support the Industry in which the Company Operateswmd-coal-mine2

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 $3.03/mmbtu wellhead as of October 12) plays favorably for North American coal in the short to intermediate future.

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. While the company is in a relatively strong position in its industry, there is too much uncertainty.

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