On Sep 20, we reiterated our Neutral recommendation on Peabody Energy Corp. (BTU), the coal miming company having majority interests in 29 mines in the U.S. and Australia. Peabody Energy currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
Peabody Energy reported mixed results in the second quarter with earnings surpassing the Zacks Consensus Estimate while revenue falling short of it. Peabody Energy successfully expanded its sales volume in the reported quarter and its cost-containment initiatives led to the positive earnings surprise.
Coal miners across the globe are facing a similar challenge – demand for coal not recovering as per expectation. Moreover, the supply glut is bringing down the selling price of coal. In such a scenario, Peabody decided to lower its operating expenses by reducing its work force in Australia. The cost saving initiatives enabled Peabody to save nearly $130 million in the first half of 2013, providing a cushion against lower revenues.
Despite the improvement in natural gas prices, it continues to pose stiff competition to U.S. coal miners. With stringent regulations in place on coal-fired electric generation units, operators are looking for non-polluting and renewable sources of energy. Even though coal still exceeds other sources of power generation in the U.S., its usage will continue to show a declining trend in the comings decades. This could impact Peabody’s future prospects.
Moreover, the company generates a significant portion of its revenue from a small group of customers. If Peabody fails to renew coal supply agreements, which are due to expire soon, the top-line could be severely affected.
Other Stocks to Consider
Other well-placed coal miners at the moment are Alliance Holdings GP, L.P. (AHGP), Alliance Resource Partners L.P. (ARLP) and Suncoke Energy Partners, L.P. (SXCP). Alliance Holdings has a Zacks Rank #1 (Strong Buy) while Alliance Resource Partners and Suncoke Energy currently retain a Zacks Rank #2 (Buy).
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