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Peabody Remains Neutral

Zacks Equity Research

We are reiterating our Neutral recommendation on Peabody Energy Corp. (BTU) 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 producers.

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 profitability.

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 pricing.

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 likes of Arch Coal Inc. (ACI) and CONSOL Energy Inc. (CNX)

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.

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