On Jun 14, 2013, we reiterated our Neutral recommendation on
premier coal company,
Peabody Energy Corporation
). Peabody currently has a Zacks Rank #3 (Hold).
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Why the Reiteration?
Peabody Energy once again reported earnings in the red, but its
cost containment efforts and improvement in the global coal
market are positive signs for the company. The company also
registered a 13% decline in total revenue from the year-ago
The decline in total revenue was attributed to a 12% drop in the
U.S. coal revenues and a 6% decline in shipment. In addition,
Australian revenues also declined 13.6% due to a 32% decline in
realized pricing per ton, partly offset by a 26% increase in
However, there are some positive factors as well. There are signs
of revival in the global metallurgical coal demand. In addition,
the rise in natural gas price in the U.S. will also lead to
gas-to-coal switching, which in a way will benefit Peabody's
thermal coal production.
The latest report of the Energy Information Administration
("EIA") suggests that the total U.S. coal consumption will
increase to 954 million short tons (MMst) in 2013 and 970 MMst in
2014 from 889 MMst in 2012. Globally, in the next five years, 450
gigawatts of new coal fired generation is projected to come
online. This will increase the annual coal consumption by 1.4
billion tones and will open up new shipment opportunities for the
Moreover, Peabody generates a large chunk of its revenues from a
limited group of customers. Peabody has long-term contracts with
these customers with some scheduled to expire this year. If the
company fails to renew contracts on favorable terms it would
surely impact profitability. In addition, the upward revision in
transportation costs could also impact the profitability of this
The coal industry is set for a gradual recovery and the companies
which warrant a look are
Alliance Resource Partners LP
Alliance Holdings GP, L.P.
Alpha Natural Resources, Inc