Peabody Beats EPS, Misses Revenue

Zacks

Peabody Energy Corporation (BTU) reported second quarter 2012 earnings of 73 cents per share, beating the Zacks Consensus Estimate of 53 cents. However, the company’s profits were lower than last year’s earnings of $1.16 per share.

The year-over-year decline was due to higher interest expenses and depreciation, depletion and amortization expenses related to the acquisition of Macarthur Coal in Australia.

Peabody’s GAAP earnings during the second quarter were 78 cents per share versus $1.10 per share reported in the year-ago quarter. The difference between GAAP and operating earnings of 5 cents was due to foreign income tax accounts.

Revenue

Peabody’s quarterly revenue was $1,998.2 million versus $1,980.5 million in the prior-year quarter, reflecting year-over-year growth of 0.9%.

The company’s revenue for the quarter fell short of the Zacks Consensus Estimate of $2,067 million.

Operational Update

Peabody’s total sales volume in the quarter was 57.4 million tons, versus 57.8 million tons sold in the year-ago quarter. The increase in sales from Australia and Trading and Brokerage offset lower U.S. production. U.S. shipments were down due to market-driven production cutbacks and negotiated customer settlements.

During the reported quarter U.S. revenues increased 4% year over year mainly due to higher realized prices in both the Midwestern and Western regions.

In the second quarter Peabody leased more than 1.1 billion tons of ultra-low sulfur coal reserves at its North Antelope Rochelle Mine, increasing its total Powder River Basin reserves to approximately 4.0 billion tons.

During the reported quarter operating costs and expenses of the company were $1.48 billion versus $1.34 billion in the prior-year quarter, up 10.5%.

The rise in cost impacted the operating profit of the company, which were $277.9 million versus $479.3 million in the prior-year quarter.

Financial Update

As of June 30, 2012, Peabody had $0.5 billion in cash and cash equivalents versus $0.8 billion as of December 31, 2011.

Long-term debt of the company as of June 30, 2012, was $6.27 billion versus $6.56 billion as of December 31, 2011. The debt level dipped as the company repurchased bonds worth $240 million during the reported quarter.

Peabody’s capital expenditure in the second quarter was $195.7 million.

Guidance

Peabody expects third quarter 2012 EBITDA to come in the range of $350 million to $450 million and adjusted earnings per share in the band of 20 cents to 45 cents.

For full-year 2012, the company is targeting total sales of 230 – 250 million tons, including 31 to 34 million tons from Australia, 185 to 195 million tons from the U.S. and the remainder from Trading and Brokerage activities.

Taking into consideration the slower-than-expected growth in the global economy, the company has decided to lower its 2012 capital expenditure budget by $200 million to $1.0 billion to $1.2 billion.

Peer Comparison

Missouri-based Arch Coal, Inc. (ACI), competing head-to-head with Peabody Corporation, is expected to announce its second quarter 2012 operating earnings on July 27, 2012.  Analysts polled by Zacks expect Arch Coal to register a loss of 17 cents per share in the second quarter.

Our View

Lackluster growth of the U.S. economy and the low gas prices impacted the demand for coal in the U.S. markets. However, the hot summer weather and gradual rise in the natural gas prices could benefit the fortunes of the coal producers.

Globally, there will be an increase in the demand for coal for power generation and Peabody expects 90 gigawatts of new coal-fueled generation to come on line worldwide in 2012.  We believe Peabody with its U.S. and Australian platform stands to benefit from the increase in demand for seaborne thermal coal.

Since seaborne thermal coal demand is expected to rise, the company has struck an agreement with Kinder Morgan Energy Partners, L.P. (KMP) to utilize Kinder Morgan’s Gulf Coast export platform. This agreement will allow Peabody to increase its Gulf Coast annual coal export capacity in the range of 5 – 7 million tons between 2014 and 2020.

Peabody Energy Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. It coincides with our long-term Neutral rating on the stock.

St. Louis, Missouri-based Peabody Energy Corporation is a private sector coal mining company. The company has interests in 28 coal operations located in the United States and Australia, and has joint venture interests in a Venezuelan mine.

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