On Dec 19, we maintained our Neutral recommendation on the coal mining company Peabody Energy Corporation (BTU). Peabody Energy currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
Peabody Energy reported mixed results in the third quarter with earnings surpassing the Zacks Consensus Estimate while revenues falling short. Peabody Energy clocked higher sales volume in the reported quarter. However, the year-over-year decline in revenues was primarily due to the lower realized price of coal in the U.S. and Australia.
The company is working towards lowering operating expenses in all its operations worldwide. In addition, Peabody has adopted a strategy to expand its business in Asia given the increasing demand for coal in the Asia-Pacific region. Recently, the company entered into an agreement with China’s Shenhua Group to create Sino-Pacific Coal Trading Corporation Pte. Ltd. The primary objective of this partnership will be to meet Shenhua’s coal demand from Peabody's global coal production platform. Peabody will most likely leverage its existing platform in these regions to feed most of the demand.
We however note that coal is up against tough competition from cheap and abundant natural gas. In addition, the new climate plan of President Obama, followed by the U.S. Environmental Protection Agency's (:EPA) proposal for granting permission for setting up new power plants, is putting immense pressure on power producing units.
Given the situation, the U.S. power producers are closing down old coal fired units and making fresh investments in natural gas fired power plants besides developing alternate energy resources. This has resulted in a gradual shrinkage in coal usage in the U.S. which will hurt domestic coal producers. Another coal operator CONSOL Energy (CNX) decided to divest $3.5 billion of coal assets to focus more on natural gas.
To add to Peabody’s woes, it generates a significant amount of revenues from a small group of customers. Any failure to renew coal supply agreements on favorable terms could impact the top line of the company. Transportation cost plays an important role in coal sales; any sudden increase in the cost of transportation could negatively impact coal sales contracts.
Other Stocks to Consider
Better-ranked stocks in the coal industry include Alpha Natural Resources, Inc. (ANR) and Suncoke Energy Partners, L.P. (SXCP). Both carry a Zacks Rank #2 (Buy).