We are reiterating our Neutral recommendation on
Peabody Energy Corp.
) after evaluating its performance in the first quarter of 2012.
The company reported mixed results in the quarter with its earnings
per share surpassing our estimate while the top line falling short
of the forecast.
Peabody's exposure in Australia allows it to cater to the
increasing demand of the emerging Asian economies such as China and
India. Besides, the expected rise in coal demand, for power
generation, over the 2009 to 2035 time period, (China and India
being the major growth contributors), would further bolster the
prospects of Peabody. The company's expanding global footprint is
an added catalyst.
Peabody continues to have a strong balance sheet, which allows
the company to explore earnings accretive investment opportunities.
Besides, the company has substantial exposure in two fastest
growing coal markets: the Powder River Basin (PRB) and Illinois
Basin. This allows Peabody to cater to the demand of domestic power
On the flip side, Peabody, like other coal generators, continues
to face stiff competition from natural gas producers. This
competitive disadvantage is not expected to dissipate going ahead.
Peabody also depends on a small group of customers for bulk sales.
Some of the contracts are expected to expire in 2012. Any failure
to renegotiate contracts on favorable terms will impact
Transportation costs account for a major portion of the total
cost of coal and act as a decisive factor in a customer's
purchasing decision. Transportation, a factor which is beyond the
control of the company, can significantly lower coal sales.
The company expects earnings per share in the second quarter
2012 to range between 40 cents and 65 cents. The company cautioned
that second quarter results will likely be impacted by a decline in
U.S. shipments and lower realized thermal and metallurgical coal
The Zacks Consensus Estimate for the second quarter is 54 cents
per share, which is nearly the mid point of the guidance provided
by the company.
Peabody Energy presently retains a short-term Zacks #3 Rank
(short-term Hold rating). The company primarily competes with the
Arch Coal Inc.
CONSOL Energy Inc.
St. Louis, Missouri based Peabody Energy is the world's largest
private sector coal mining company and a global leader in clean
coal solutions. The company owns majority interests in 29 mines in
the U.S. and Australia.
ARCH COAL INC (ACI): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis
CONSOL ENERGY (CNX): Free Stock Analysis Report
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