Peabody Energy Corp.: Best Coal Producer In Its Class, Excellent Potential

If you want to invest in an energy resource that's cheap, has a dependable supply and a proven track record, don't forget about coal. In the very (very) long term, it may become obsolete, but for the foreseeable future coal is an excellent investment for an energy source that can immediately step in to cover the rising cost and dwindling supply of oil, while alternative energy sources need to be more fully developed before they can take over as primary suppliers of electricity and more.

If you're going to invest in coal, Peabody Energy Corporation (BTU) is an excellent bet. Frequently considered the best coal producer in its class, Peabody has the resources and size to weather any blips in the sometimes volatile coal market. Its U.S. operation is immense -- in 2006, 20% of all coal mined in America was produced by Peabody, and today, 10% of electricity produced by any source is fueled by the company's coal.

By far the most profitable part of its American operation are the company's mines in the Western states, primarily in the Powder River Basin in Wyoming and Montana, which account for 75% of Peabody's production. By contrast, the Eastern states production is less profitable, mostly due to transportation problems. To that end, Peabody has recently spun off Patriot Coal Corp.(PCX), based out of Appalachia and Illinois, which analysts say should reduce costs without having a significant impact on the income stream.

Beyond the U.S., however, Peabody is set up to take great advantage of the current coal boom in Australia, where the demand for metallurgical coal, used in steel production, is growing as Asian countries, India in particular, are spending significant resources to build up their infrastructure.

In 2006, Peabody acquired Excel Coal Ltd (previously XEXL), a coal mining company operating out of Sydney, which tripled its presence in Australia. There are some problems on the Australian market, primarily concerning bottlenecks in distribution, but Peabody and the rest of the industry are investing in increased dock capacity to address the issue. The effects of that work won't be felt for another year or more, but as I think this is a company that will continue to grow at home and abroad, it will be worth the wait.

Type of Stock: Peabody Energy Corporation is the world's largest private-sector coal company.

Price Target: Bear Sterns estimates that this will hit $62 a share by the end of 2008. Buying in the mid-$40's would make for a potentially excellent upside return.