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The earnings release by Peabody Energy (NYSE:BTU) today helped me reinforce my long-term bullish thesis on the coal players with a relatively high thermal coal exposure. It also helped me to decide about avoiding stocks with high metallurgical coal exposure. I recommend a long position in BTU and its peer, CONSOL Energy (NYSE:CNX). However, I remain skeptical about metallurgical coal players like Alpha Natural Resources (NYSE:ANR) and Walter Energy (NYSE:WLT).

Industry Overview - Coal

Coal is primarily of two types: thermal coal (used to fire power stations to produce electricity) and metallurgical coal (a key raw material used in the production of steel). The former's market dynamics have suffered as a result of the shale gas boom, which drove natural gas prices so low that consumers, especially utilities, started to switch to the cheaper source of fuel. On the other hand, metallurgical coal's demand and price dropped as a result of poor demand for steel, as a result of euro debt crisis and depressed global economic growth especially in China, U.S. and the emerging markets.

Earnings Review - BTU:

Today, Peabody Energy, the largest U.S. coal producer in terms of volume, released its third quarter earnings which topped analysts' estimates for both revenues and EPS. The company's EPS of 51 cents (excluding one-off items) exceeded the consensus of 34 cents, while its revenue of $2.06 billion was $90 million greater than the expected value. However, as a result of declining prices and sluggish demand, the company's income from continuing operations more than halved, to 46 cents from the figure of $1.04 achieved last year.

The following table shows a summary of some key financial measures the company has targeted for 2012.

Financial Measure

Year-end (2012) target

EPS

$1.88-$2.08

Adjusted EBITDA

$1.75 - $ 1.85 billion

Total sales

240 - 250 million tons

The main reason for performance above expectations was the unexpected surge in U.S. coal shipments as the company sold more than expected coal from its Powder River Basin ((NYSEARCA:PRB)) mines. In addition, with natural gas prices bouncing back from record lows, the prospects for thermal coal are improving. The thermal coal industry has also witnessed a series of production cuts, which have helped the prices to improve from 2-year lows reached earlier in the year. Peabody was also forced to follow its peers in reducing production in reaction to waning demand.

The best part was the fact that the company's Australian operations performed much better than the lackluster performance exhibited last quarter. According to Reuters, the company's Australian shipments reached a record high level of 8.5 million tons in 3Q2012 and its target for Australian sales is now 31-33 million tons in 2012, as compared to 25 million tons in 2011.

The following table compares Peabody Energy Corp. with its peers, CONSOL Energy, Arch Coal Inc. (NYSE:ACI), Alpha Natural Resources and Walter Energy.

BTU

CNX

ACI

ANR

WLT

Dividend Yield

1.50%

1.42%

1.52%

-

1.31%

P/E

7.40

13.19

-

-

10.54

Forward P/E

13.84

24.62

-

-

15.49

P/FCF

10.76

-

-

-

15.15

Source: Finviz.

Source: Buy Peabody Energy, The Best Bet Among Coal Stocks