Buy BTU To Play A Bottom In Coal Stocks

| About: Peabody Energy (BTU)
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In one of our previous articles, we chose Peabody Energy Corp. (BTU) as our favorite pick among coal stocks. However, its recent earnings release has disappointed one and all (most disappointing has been its Australian operations' performance). Still we continue to remain bullish on the stock in the long-term, given its cheap valuations, stable sales, strong liquidity position, and high PCI coal exposure. Risk-averse investors might want to wait for a reduction in the macroeconomic uncertainty, as well as uncertainty in the Coal Industry, but might lose the opportunity of making considerable gains in the long-term considering that the stock is currently trading close to its 52-week lows.

The article also reviews the latest earnings release of two other major coal players, CONSOL Energy (CNX) and Arch Coal Inc. (ACI).

Earnings Review - BTU

BTU reported its 2Q2012 earnings a few days ago, according to which its net income per share was 75c, showing a 28% drop on a YoY basis. Revenues saw an increase of almost 1% during the same time period, and rose to $1.99 billion, but still fell short of analyst consensus estimates of around $2.06 billion.

Its Australian coal operations have shown a disappointing performance, as its profit margins fell by more than 50% in the segment. The company attributes this poor performance to a lot of challenges it faced in Australia, which include "performance at contractor operated mines, the longwall move, lower thermal coal pricing, a temporary shift in the mix of met coal, and the introduction of the carbon tax". However, the company is aggressively taking steps so as to "increase productivity, reduce costs, and improve reliability" at contractor-operated mines in Australia. It is also expecting that once these steps pay off, hopefully after 1H2013, almost 75% of its Australian production will be company-operated.

In the U.S., performance was a lot better as the company experienced an almost 35% increase in its U.S. gross margin/ton, as a result of an increase in realized prices, despite a slight reduction in the sales volume, which dropped due to "contract restructurings and reduced shipments under requirements contract".

Metallurgical coal and thermal coal prices plummeted to $210/ton and $115/ton from their previous levels of $330/ton and $130/ton, respectively.

Peabody is viewing the recent rebound in U.S. natural gas prices as a healthy sign for bolstering coal demand, but thinks that a "significant recovery is not yet at hand". The company has given a range of 20c-45c per share for its 3Q earnings, way below analyst forecasts of 65 cents.

During this quarter, BTU leased more than 1.1 billion tons of ultra low sulfur coal reserves, and is going to expand its Gulf Coast export capacity following an agreement with Kinder Morgan. Its liquidity position is quite lucrative, as is evident from its operating cash flow of $280 million and a quarter-end cash balance of $489 million, which enabled it to repurchase $242 million of below-par bonds and buy back almost $100 million of shares. Furthermore, the company does not have any significant debt maturities till 2015.


Forward P/E
(1 year)

(5 year


Dividend Yield

Price YTD

Peabody Energy












Alpha Natural Resources (ANR)






Arch Coal Inc.






Looking at the table above, we can see that BTU is a very cheap stock given its forward P/E ratio of just 8x, EV/EBITDA of 5x and a YTD share price drop of 46%. We continue to advise investors to stay away from relatively riskier Arch Coal Inc. and Alpha Natural Resources *.

*ANR is going to report its 2Q earnings on August 8.

(Click to enlarge)

Source: Google Finance

Another Potential Buy - CONSOL Energy

CONSOL Energy can also be a potential buying opportunity in the Coal Industry. Although relatively more expensive, the stock is the least risky amongst its peers, given that it is a producer of natural gas as well. Furthermore, the recent quarterly results of CNX have been impressive, as its second quarter profit almost doubled relative to last year, although revenue and gross margins declined. This is primarily a result of its extensive cost-cutting strategies like foreclosure of its Fola operations in West Virginia, which has reduced its production by almost 800,000 tons this year. In addition, the company has been extensively developing its natural gas operations, and so suffered the least from the coal-to-gas switching trend.

Review - Arch Coal Inc. 's 2Q2012 Earnings

Arch Coal Inc. released its 2Q2012 earnings on Friday, according to which its adjusted net loss per share was 10c, beating analyst expectations of 18c, but falling short of the 4c profit it posted in 2Q2011. The loss was primarily attributable to an increase in operating costs per ton and reduced shipments. The stock was trading at its 10-year low on Thursday, but then surged by 12% post release.

The company is bullish about thermal coal's prospects for improvement, as the CEO proclaimed, "Summer has arrived bringing heat, power load, and increased coal burn." However, it lowered its sales forecast for metallurgical coal, citing higher supply growth relative to demand.

The better-than-expected performance was a direct result of ACI's cost-cutting efforts like closing five mines in the high-cost Appalachian region. However, the company is optimistic about the rebounding of the Coal Industry, as the global economy picks up pace.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.