Cloud Peak Energy Could Get Bought Out by Year's End

| About: Cloud Peak (CLD)

On the heels of Alpha (ANR) bidding for Massey (NYSE:MEE), Cloud Peak Energy (NYSE:CLD) looks ripe for a buyout. We think shares could fetch $30 apiece and, independent of a buy-out, CLD's earnings multiple has plenty of room to expand. Cloud Peak generated $1.37 billion in revenues in 2010, which was a decrease of 1.96%, after rising 12.78% in 2009. The EBT margins in 2010 and 2009 were 15.46% and 18.2%, respectively.

The respective ROEs were 8.6% and 150.9%. The 30-day put/call ratio is 0.5. Cloud Peak Energy is the third-largest U.S. coal producer and the only pure-play Powder River Basin coal company. Cloudpeak is led by president and CEO, Colin Marshall. Before his appointment as head of Cloud Peak Energy, Mr. Marshall was president and CEO of Rio Tinto Energy America (RTP) prior to the company’s public offering as Cloud Peak Energy. Preceding RTEA, Mr. Marshall was the general manager of Rio Tinto’s (NYSE:RIO) West Pilbara iron ore operations. He has valuable international experience in Pacific markets, having been located in Tom Price, West Australia, where he managed four iron ore mines.

We think the company deserves a take-over premium; however the current share price is below fair value on a discounted cash flow basis that ignores any possibility of a takeover. Cloud Peak is the only remaining pure-play Powder River Basin coal company. Any possibility of exports out of the West Coast (likely Washington State's Columbia River) would likely ignite shares. Powder River Basin Coal is low in sulphur content and much easier to mine than Appalachian coal. The Powder River Basin, located in Wyoming and parts of Montana, is far from major metropolitan areas and made its coal less attractive than coal in the high-consumption East. We think that will change once foreign export and railroad infrastructure capabilities expand.

Given CLD's eviable position, we think Peabody Coal (BTU) or Arch Coal (ACI) could mull a bid on CLD by year's end.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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