On Sep 20, we reiterated our Neutral recommendation on
Peabody Energy Corp.
), the coal miming company having majority interests in 29 mines
in the U.S. and Australia. Peabody Energy currently has a Zacks
Rank #3 (Hold).
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Why the Reiteration?
Peabody Energy reported mixed results in the second quarter with
earnings surpassing the Zacks Consensus Estimate while revenue
falling short of it. Peabody Energy successfully expanded its
sales volume in the reported quarter and its cost-containment
initiatives led to the positive earnings surprise.
Coal miners across the globe are facing a similar challenge -
demand for coal not recovering as per expectation. Moreover, the
supply glut is bringing down the selling price of coal. In such a
scenario, Peabody decided to lower its operating expenses by
reducing its work force in Australia. The cost saving initiatives
enabled Peabody to save nearly $130 million in the first half of
2013, providing a cushion against lower revenues.
Despite the improvement in natural gas prices, it continues to
pose stiff competition to U.S. coal miners. With stringent
regulations in place on coal-fired electric generation units,
operators are looking for non-polluting and renewable sources of
energy. Even though coal still exceeds other sources of power
generation in the U.S., its usage will continue to show a
declining trend in the comings decades. This could impact
Peabody's future prospects.
Moreover, the company generates a significant portion of its
revenue from a small group of customers. If Peabody fails to
renew coal supply agreements, which are due to expire soon, the
top-line could be severely affected.
Other Stocks to Consider
Other well-placed coal miners at the moment are
Alliance Holdings GP, L.P.
Alliance Resource Partners L.P.
Suncoke Energy Partners, L.P.
). Alliance Holdings has a Zacks Rank #1 (Strong Buy) while
Alliance Resource Partners and Suncoke Energy currently retain a
Zacks Rank #2 (Buy).