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Shares of Peabody Energy (BTU) rose some 11.8% in Monday's trading session. The coal company with operations in the US and Australia reported its third quarter results before the market open.

Third Quarter Results

Peabody, the world's largest private coal company reported third quarter revenues of $2.06 billion, up 4% on the year. Revenues came in ahead of analysts consensus of $1.96 billion.

Income from continuing operations fell 58% to $122.9 million. GAAP diluted operating earnings per share came in at $0.46 per share, beating analysts consensus of $0.34 per share. GAAP Net income fell to $41.6 million, or $0.16 per share.

Adjusted income from operations, adjusted for remeasurement of foreign income tax, fell 46% to $136.5 million. Adjusted earnings per share fell to $0.51 per share.

CEO and Chairman Gregory H. Boyce commented on the results, "The Peabody team delivered strong third quarters results, as expanded U.S. margins, record Australian volumes and aggressive cost control largely offset prices declines in Australia. Peabody remains focused on significant cost containment and capital discipline activities and expects to realize the benefit of these programs over the next year. While the global coal environment remains challenged, there are indications that markets are stabilizing through U.S. gas-to-coal switching, higher European coal-fueled generation and increased China infrastructure spending."

More Detailed Information

Coal demand in the US rose sharply as natural gas prices rebounded throughout the third quarter. Coal's percentage of electricity generation in the US rose 9 percent point to 39%. Natural gas prices rose to $3.50 per mmBtu. Peabody believes that coal is competitive at prices of $2.50-$2.75 mmBtu for natural gas at most of its production basins. Despite the recovery in the third quarter, annual demand is likely to fall by 120 million tonnes for 2012, followed by an expected increase of 40 million tonnes demand in 2013.

Outlook

For the full year of 2012, Peabody targets EBITDA of $1.75 to $1.85 billion. Adjusted diluted earnings per share are expected to come in between $2.10-$2.30 per share, including a $0.22 net tax benefit related to the integration of acquired assets. On average, analysts expected Peabody to guide for full year earnings of $1.86 per share.

Peabody expects to sell 240-250 million tons of coal in 2012. This includes sales of 31-33 million tons in Australia, 188-192 million tons in the US and the remainder in trading and brokerage activities.

Valuation

Peabody ended its third quarter with $648 million in cash and equivalents. The company operates with $6.36 billion in short and long term debt for a net debt position of $5.71 billion.

For the first nine months of 2012, Peabody generated revenues of $6.06 billion. Net income attributable to shareholders came in at $420 million, or $1.55 per diluted share. This includes a charge of $0.34 per share, related to discontinued operations.

After a 12% rally on Monday, the market values Peabody at $7.8 billion. Based on a rough annual revenue estimate of $8 billion, this values the firm at 1.0 times annual revenues. The firm is valued at 13 times expected annual adjusted earnings.

Peabody currently pays a quarterly dividend of $0.09 per share, for an annual dividend yield of 1.2%.

Investment Thesis

Year to date, shares of Peabody have fallen some 12%. Shares traded around $35 per share in the first months of the year, before hitting lows of $20 in July. Low natural gas prices put pressure on coal prices as well which impacted the prospects for coal producers. A recent recovery sent shares to $29.

Over the past five years, shares have fallen some 40%. Shares fell from $80 in 2008 to lows of $20 later that year. Shares recovered to $70 in early 2011, before falling back to $29. Between 2008 and 2012, Peabody grew annual revenues from $6.0 billion to an expected $8.0 billion this year. Net income fell from $953 million in 2008 to expected adjusted earnings of $600 million in 2012.

Peabody had a rough year. The multi-billion dollar acquisition of Macarthur Coal in 2011 was made when market prices for metallurgical coal were standing at much higher levels. The third quarter report gives investors and analysts some hope. Demand is stabilizing as natural gas prices are on the rise. Besides better market conditions, the firm announced a new $100 million cost saving plan. The plan involves job cuts and the elimination of some independent contractors.

Peabody is well positioned for a rebound in the coal market, as first signs of a recovery emerge. Investors need to be prepared for a rocky ride though, as the debt load from past acquisitions makes the shares fairly leveraged, and vulnerable for a temporary setback.

Source: Peabody Energy: Third Quarter Results Offer Some Prospects For Long-Term Shareholders