We have downgraded our recommendation on Peabody Energy Inc. (BTU) to Underperform from Neutral as the fourth quarter results of the company disappointed expectations and missed our projection by quite a margin.
Peabody, like other coal generators, continues to face stiff competition from natural gas producers and this competition is not expected to dissipate going ahead. Besides, Peabody depends on a small group of customers for bulk sales. Any unfavorable contract or failure to renew contracts will impact the company’s fortunes.
Again, Peabody’s commercial viability depends upon its ability to continually acquire and develop economic coal reserves and develop mines to extract all of its proved and probable reserve. Since the company is yet to apply for all the necessary permits, it can prohibit Peabody from developing all its reserves.
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 international footprint exposes the company to geo-political risk , which can adversely impact the operation and financial results.
One silver lining during the quarter was the acquisition of Macarthur Coal. We believe this will strengthen the company’s position in the global coal export market. Besides, the expected rise in coal demand, for power generation, over the 2009 to 2035 time period, would bolster the prospects further for Peabody, given its expanding global footprint.
Evaluating the pros and cons, we have decided to cut the long-term recommendation to Underperform from Neutral, which seamlessly coincides with the Zacks #5 Rank retained by the stock, translating into a short-term Strong Sell rating.
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.The company primarily competes with the likes of Arch Coal Inc. (ACI) and CONSOL Energy Inc. (CNX).
ARCH COAL INC (ACI): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis Report
CONSOL ENERGY (CNX): Free Stock Analysis Report
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