Peabody Energy Corp. (BTU) is a $6.1 billion company that produces coal in the Illinois and Powder River basins as well as in various parts of Austrailia. Peabody currently trades near its 52 week low and offers investors a lot of value and a way to play rebounding coal and basic material prices.
Over the past year Peabody Energy has fallen victim of a cycle that has beaten down shares of basic material companies. As seen below, one year and year to date performances for basic materials is far behind all of the other sectors.
This bottoming for basic materials has not gone unnoticed and a rebound is sure to raise the stock prices of companies like Peabody that operate in this space. Taking notice of this, Nomura Securities upgraded Peabody on March 18th from Reduce to Neutral citing:
The upgrade comes as key market concerns and EPS risks surrounding BTU are now factored into the valuation, according to the firm's view.
"We believe the cost pressures facing BTU are largely well known by the market and our recent visit with management gave us increased confidence that BTU can achieve improved unit costs in 2H13," analyst Curt Woodworth stated. "Correlation to the underlying commodity remains a key risk factor to press a short trade on BTU given our expectation for PRB prices to move higher by the end of 2013 and the potential for improved met prices as global steel production improves in Asia. We believe a solid summer coal burn driven by reverse switching and normal weather can result in significant draws of PRB inventories. Peabody continues to trade at rich multiples even off 2014 our estimates (7.9x EV/EBITDA), which already assume a healthy recovery in benchmark met coal prices back to $190/tonne."
Currently, analysts have a mean target price for BTU of $31.89 and median of $33.75, both well above the current price of $22.49. Average estimated quarter earnings for the next quarter are a loss of $0.14 per share on estimated revenues of $1.78 billion. For 2013, the average estimated earnings per share is $0.39 on estimated revenues of $7.76 billion which is 4% lower than 2012's reported revenues of $8.077 billion.
Positives for BTU
- Over the past years, "Peabody has smartly increased its exposure to higher growth, lower-cost coal mining regions such as PRB, ILB, and Australia while at the same time exiting the high-cost Appalachian coal basins."
- Free CashFlows, or Cashflows after Operating and Investment activities were sufficient to allow Peabody to pay off half a billion in debt and repurchase $100 million of common shares in 2012.
- Revenue growth, despite the current unfavorable cycle for coal, has grown consistently over the past five years from $4.5 billion in 2008 to $8.077 Billion in 2012.
- The World Coal Consumption Annual Growth Rate has recently been on a rise since 2009's recession and is currently at 9% as evidenced by the graph below, published by indexmundi.com
- Peabody is the world's largest private-sector coal company and the only global pure-play coal investment which puts it in optimal position to benefit from a rebound in coal prices.
- BTU offers a modest dividend yield of 1.6%.
Peabody is in the perfect position to benefit from demand-driven price increases in coal as it operates in some of the most profitable locations in the world. This is definitely a long-term cyclical play and anyone interested in a more diversified approach does have the option of investing in Market Vectors Coal ETF (KOL), which holds BTU as one of its top 10 holdings.