On Dec 19, we maintained our Neutral recommendation on the
coal mining company
Peabody Energy Corporation
). Peabody Energy currently has a Zacks Rank #3 (Hold).
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Why the Reiteration?
Peabody Energy reported mixed results in the third quarter with
earnings surpassing the Zacks Consensus Estimate while revenues
falling short. Peabody Energy clocked higher sales volume in the
reported quarter. However, the year-over-year decline in revenues
was primarily due to the lower realized price of coal in the U.S.
The company is working towards lowering operating expenses in all
its operations worldwide. In addition, Peabody has adopted a
strategy to expand its business in Asia given the increasing
demand for coal in the Asia-Pacific region. Recently, the company
entered into an agreement with China's Shenhua Group to create
Sino-Pacific Coal Trading Corporation Pte. Ltd. The primary
objective of this partnership will be to meet Shenhua's coal
demand from Peabody's global coal production platform. Peabody
will most likely leverage its existing platform in these regions
to feed most of the demand.
We however note that coal is up against tough competition from
cheap and abundant natural gas. In addition, the new climate plan
of President Obama, followed by the U.S. Environmental Protection
Agency's (EPA) proposal for granting permission for setting up
new power plants, is putting immense pressure on power producing
Given the situation, the U.S. power producers are closing down
old coal fired units and making fresh investments in natural gas
fired power plants besides developing alternate energy resources.
This has resulted in a gradual shrinkage in coal usage in the
U.S. which will hurt domestic coal producers. Another coal
) decided to divest $3.5 billion of coal assets to focus more on
To add to Peabody's woes, it generates a significant amount of
revenues from a small group of customers. Any failure to renew
coal supply agreements on favorable terms could impact the top
line of the company. Transportation cost plays an important role
in coal sales; any sudden increase in the cost of transportation
could negatively impact coal sales contracts.
Other Stocks to Consider
Better-ranked stocks in the coal industry include
Alpha Natural Resources, Inc.
Suncoke Energy Partners, L.P.
). Both carry a Zacks Rank #2 (Buy).