Peabody Energy: Free Cash Flow Yield Of 8.5% May Not Matter

| About: Peabody Energy (BTU)

Summary

BTU's dividend yield is 5%.

The coal company is still free cash flow positive.

This is what a business looks like when the government comes after you.

The Coal industry under President Obama reminds me of Tobacco under President Clinton.

Current consensus doesn't expect BTU to be profitable again until 2017.

Peabody Energy (NYSE:BTU) reports their calendar 4th quarter financial results before the opening bell on Tuesday, January 27th, 2015.

Analyst consensus per Thomson Reuters, is expecting a loss of $0.35 per share (versus $0.00 earnings in q4 '13) on $1.645 billion in revenues for a decline in revenues y/y of 5%.

In the 3rd quarter of 2014, revenues fell 4% y/y while operating income fell 68%. Cost control in the Australia Mining division, which is roughly 50% of BTU's total revenues helped.

The weak Aussie dollar could help 4th quarter results too.

Even though BTU fell 50% between Sept 30th and this earnings report the 4th quarter consensus hasn't moved much since the October '14 earnings release: back in October just after earnings, q4 '14 consensus estimates were for a loss of $0.35 on $1.64 billion in revenues.

I remember in the late 1990s in the waning days of the Clinton Administration, how tobacco stocks traded, and the action in coal today reminds me of the action in Philip Morris around the late 1990's.

It makes life tough for an industry or sector when the government wants you out of business.

That being said, there are some valuation positives to BTU that are worth mentioning, although like energy and some other basic materials names, I would not be buying this stock in front of the Tuesday morning earnings report.

Although other coal names probably represent higher risk in terms of ongoing concern probability, I would rather wait for a stock to stabilize technically and base on a chart before initiating a new position after the drubbing this stock has taken.

Valuation:

At roughly $6.50 per share, which is where the stock closed Friday, January 23rd, BTU is trading:

  • 50% of BTU's stated book value of $13.40 per share, with no goodwill explicitly disclosed on the balance sheet.
  • 4(x) BTU's operating cash-flow per share, and 7(x) free-cash-flow per share.
  • The dividend yield is over 5% and in my opinion remains secure, given that the annual dividend in dollars is approximately $92 million, while 4-quarter trailing free-cash-flow as of 9/30/14 was $240 million, and even if it is cut in half, still covers the dividend. While the dividend isn't iron-clad, BTU has been reducing capex sharply, so in fact the capex reduction is allowing for the free-cash-flow generation. However at some point you start cutting bone.
  • Morningstar still retains their $14 intrinsic value estimate on BTU, which is a plus. My own model doesn't have an estimate at this time since it is based on a forward-4-quarter EPS estimate, which remain negative for BTU at this point in time.
  • Another positive which is not valuation-related is the Senate victories of Mitch McConnell of Kentucky and Shelley Moore Capito of West Virginia, both key coal mining states and both Senator's are very much pro-coal and ran on a coal platform. (On November 4th, BTU closed near $10 per share and then popped to $12 in the following week, undoubtedly on the election news, and has since been cut in half. )

What do I worry about with BTU ?

Well the obvious is that the coal industry has become a target of Washington's green lobby and it isn't just US coal either. The President's APEC (Asia-Pacific Economic Cooperation) Summit trip after his election made it clear that air quality in China was a growing issue, and that is all about coal and China's use and consumption of coal.

In addition, BTU's $6.0 billion of debt leaves the coal giant with a 44 - 45% debt to capital ratio and dwindling cash-flow. In the trade-off between debt service and the dividend, the dividend will lose every time.

Consensus estimate revisions:

Peabody

EPS Consensus Trends

Revenue Consensus Trends

cal

cal

y/y gro

cal

y/y gro

cal

cal

y/y gro

cal

y/y gro

2014

2015

est

2016

est

2014

2015

est

2016

est

1/24/2015

($1.40)

($0.68)

-51%

$0.00

-100%

$6,735

$6,798

1%

$7,103

4%

dec '14

($1.40)

($0.52)

-63%

$0.21

-140%

$6,736

$6,867

2%

$7,277

6%

nov '14

($1.40)

($0.50)

-64%

$0.24

-148%

$6,736

$6,869

2%

$7,277

6%

oct '14

($1.40)

($0.50)

-64%

$0.24

-148%

$6,739

$6,876

2%

$7,276

6%

july '14

($1.13)

($0.13)

-88%

$0.42

-423%

$6,701

$7,232

8%

$7,683

6%

apr '14

($0.66)

$0.28

-142%

$0.94

236%

$6,763

$7,427

10%

$7,881

6%

jan '14

$0.14

$0.82

486%

$1.45

77%

$7,133

$7,812

10%

$8,757

12%

Dec '13

$0.54

$1.32

144%

$1.37

4%

$7,603

$8,143

7%

$10,176

25%

# of est's

16

22

18

16

17

15

* Source: ThomsonReuters current and historical consensus estimates

* BTU's calendar year ends 12/31

One thing I will be focused on after Tuesday's earnings release will be the change in revenue estimates for 2015 and 2016. If revenue can begin to stabilize, (and there doesn't seem to be any tangible reason for that to happen right now), then I'd grow more optimistic about the prospects for the stock.

Again, this is a higher-risk stock, and while some valuation metrics remain compelling, I wouldn't step in front of the stock before Tuesday and instead would wait and digest the earnings report, and see how the stock price reacts.

In 2002, the stock traded between $4 - $6 per share before trading as high as $86 in June, of 2008.

Disclosure: The author is long BTU, KOL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Industrial Metals & Minerals, , Earnings
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