Peabody Energy Corp. (BTU) will release its second quarter 2013 financial results before the market bell on Jul 23, 2013. In the prior quarter, this coal operator reported a positive earnings surprise of 64.29%. Peabody currently has a Zacks Rank #4 (Sell). Let’s see how things are shaping up at Peabody prior to this announcement.
Factors to Consider This Quarter
The soft performance of the coal industry in 2012 lingered in the first half of 2013. However, the demand for coal is likely to pick up in the subsequent quarters with an increase in natural gas prices.
In this commodity supply surplus environment mine operators are selectively developing mines to cope with the slackness in demand. This situation has prompted Peabody to lower its capital expenditure for 2013 by nearly 50% from the 2012 level to a range of $450 million to $550 million.
Peabody is also working to lower its operating expenses and has undertaken cost saving initiatives. The cost savings could be marginally offset by expenses involved in implementation of longwall operations in Twentymile Mine, in Routt County, Colo., and in Wambo Mines in New South Wales, Australia.
However, there is some good news for the coal industry. The World Steel Association projected nearly 3% year-over-year growth in global steel usage in 2013 and 2014. Positive steel fundamentals can drive the demand for Peabody’s premium coal.
In addition, nearly 300 gigawatts of coal fired power units will come on-line globally over the next five years. Since the expansion will mainly take place in the developing economies where production of coal is much lower than domestic demand, it could open up new shipment opportunities for Peabody.
Our proven model does not conclusively show that Peabody Energy is likely to beat earnings this quarter. That is because a stock needs to have both a positive earnings Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +40.0%. This is a leading indicator of a likely positive earnings surprise for the shares.
Zacks Rank #4 (Sell): Peabody’s Zacks Rank #4 complicates the forecasting power making surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Here are some companies tied to the coal industry worth considering on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:
Alliance Resource Partners LP (ARLP) has earnings ESP of +2.50% and carries a Zacks Rank #1 (Strong Buy).
Suncoke Energy Partners, L.P. (SXCP) has earnings ESP of +6.82% and carries a Zacks Rank #2 (Buy).
CONSOL Energy Inc. (CNX) has earnings ESP of +21.05% and carries a Zacks Rank #3 (Hold).
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