Buy, Sell or Hold: Peabody Energy Corp. (NYSE: BTU) May Be Too Hot to Handle
[Originally published at Money Morning]
Peabody Energy Corp. (NYSE: BTU) provides the coal that creates 10% of America’s electricity.
In fact, the company’s coal creates 2% of the world’s electricity.
The stock is up almost 100% from the 12-month lows it set last summer. And after a quick recent pullback, Peabody Energy’s shares appear to be on the march once again.
Though this is a high-quality investment, we’re in dangerous territory here. It’s time to “Hold” Peabody Energy (**) – until a needed pullback gives investors a chance to add more shares.
A Powerhouse Power-Generator
Peabody Energy shares have soared 95% from the lows they reached back in June (with a 52-week closing low of $35.59) – propelled, in part, by a commodity-fueled bull market.
This share-price surge has almost doubled the company’s market cap – to a current $18.8 billion – which I believe leaves the stock vulnerable to a profit-taking pullback. While there was a short-term correction in the last few days, Peabody shares jumped $3.37 – or 5.11% – to close at $69.32, after setting the new 52-week high of $69.61 in afternoon trading.
After such a scorching run, the odds of a pullback are pretty high. Still, this is a company that investors will want to own long-term – and for five very good reasons.
You see, Peabody Energy:
- Is the world’s largest private-sector coal company.
- Has an active global-coal-trading platform.
- Logged a record $6.86 billion of revenue in 2010.
- Accounts for 10% of all electricity generation in the United States and 2% of global electricity production.
- Is growing its production capacity.
Founded in 1883 and based in St. Louis, Peabody Energy has evolved into a global heavyweight with interest in 28 coal operations. As I said, its coal products fuel 2% of the world’s electricity production including 10% in the U.S. market.
That fact means Peabody possesses a unique view into the U.S. economy itself, as power stations in different parts of this country have different demands.
Peabody Energy produces coal from mines in the United States and Australia, while sourcing additional seaborne thermal coal from Indonesia. That means the company is active in three of the largest coal producing and exporting countries in the world.
The company has an active global-coal-trading platform, which lets it leverage additional market capacity knowledge. This trading platform gives it a real edge. In fact, Peabody has the ability to track – in “real time” – the worldwide demand for different “flavors” of coal.
Peabody really showed its chops last year, when the company posted a record $6.86 billion of revenue. The surge in revenue was propelled by higher volumes and pricing from mining operations in both the United States and Australia.
2010 sales volumes totaled 245.9 million tons, compared with 243.6 million tons in 2009. Australia shipments jumped 21% to 27 million tons, and revenue from that country rose 50% on higher prices for both metallurgical and seaborne thermal coal.
“Peabody delivered the second best year in company history, with record safety performance, strong cost containment and margin expansion in every operating region,” said Peabody Energy Chairman and Chief Executive Officer Gregory H. Boyce. “While heavy rains and other supply disruptions create near-term logistics challenges, they also result in significant market upside for Peabody’s unpriced metallurgical and thermal export coal beyond the first quarter. At the same time, our platform is in expansion mode to serve the seaborne Pacific markets, which have the greatest sustainable growth opportunities and pricing leverage.”
Peabody believes the world is in the early stages of a long-term super-cycle for coal, as China, India and other emerging nations dramatically increase energy use, steel consumption grows globally, and oil becomes increasingly scarce.
Economic growth in emerging Asia is expected to be the driver of large increases in thermal and metallurgical coal, the company said. Some 390 gigawatts of new coal-fueled generation are expected to be built globally through 2015, requiring 1.2 billion metric tons of annual coal supply. Global steel production is expected to rise more than 30% during that time, requiring approximately 300 million metric tons of additional metallurgical coal supply annually.
For 2011 the company is targeting total sales of 245 to 265 million tons, including 28 to 30 million tons from Australia, 195 to 205 million tons from the United States, and the remainder from trading and brokerage activities.
Advice For Investors
Peabody currently has a market cap of $18.8 billion, with an “enterprise value” (EV) of $19 billion once net debt and cash are added to the balance sheet.
The stock price is up 43% in the last 52 weeks, beating the Standard & Poor’s 500 Index return of 16.9%. It pays out a small dividend, with a yield of about 0.5%.
Peabody Energy is one of those companies that every long-term investor should have exposure to. But at a time when global geopolitical risk is escalating to frightful levels – and after the company’s stock has moved so far, so quickly – the risk of a major pullback outweighs the risk of missing out on a continued run-up in share-price.
If you already own Peabody shares, hold onto them. If you are looking to create a new position in Peabody’s stock, let’s employ some patience and look for a better initial entry point than the top of a 52-week “breakout.” Wait for a pullback and then buy new shares.