Patriot Coal's Bankruptcy Offers Opportunity In Peabody Energy

| About: Peabody Energy (BTU)
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Near the close of yesterday's trading session, Patriot Coal (PCX) dived more than 50% on news that a bankruptcy filing was imminent.

Catching some of the flack were the rest of the coal names, with Peabody Energy (BTU) falling to $23.31. Peabody is trading at $23 on the nose in Tuesday's pre-market action.

With essentially every name in the coal space trading near 52 week lows and seemingly cheap valuations, it's worth taking a look at some of these coal companies. The strongest investment potential appears to be in Peabody.

Here are 5 reasons why BTU should be strongly considered as a potential investment:

  1. 93% of sales are under long-term agreements: While there is always the risk that a major customer defaults or a large portion of the agreements terminate, to have 93% of their sales locked up for the long-term adds meaningful stability to sales.
  2. 2011 saw record revenues and profits: 18% revenue growth, 21% EPS growth, and 50% operating cash flow growth. Extremely strong growth for a company operating in a "dead" industry.
  3. While U.S. companies have been quick to utilize natural gas as a result of ultra-low prices and tough coal regulations, this has not happened to the same extent overseas: A main thesis for getting out of coal investments has been that natural gas has officially taken over, and coal is on its way out. The truth is that international markets don't enjoy the same low natural gas prices that we do, and coal demand is still strong as a result.
  4. Overseas coal demand rose 6% as a result of recently constructed electricity generators powered by coal.
  5. BTU trades at 6.5 times earnings, 6.8 times forward earnings: Expectations of zero, even negative near-term growth are already priced into the stock. With energy prices (excluding natural gas), coal in particular, near their yearly lows, and natural gas prices on the rise, the worst appears to be over. 2012 will likely go in the books as a no-growth year, but the long-term fundamentals remain intact.

Conclusion

Peabody is not going to go the same route as Patriot. While BTU has some significant debt on its books, the company has gross profits of almost $2.5 billion a year compared to $6.65 BB in debt; hardly unmanageable. Coal production is not a dying industry, and these are the kinds of valuations we see at bottoms. BTU is worth a good, hard look.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BTU over the next 72 hours.