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Analyst Blog

On Jun 14, 2013, we reiterated our Neutral recommendation on premier coal company, Peabody Energy Corporation (BTU - Analyst Report). Peabody currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

Peabody Energy once again reported earnings in the red, but its cost containment efforts and improvement in the global coal market are positive signs for the company. The company also registered a 13% decline in total revenue from the year-ago quarter.

The decline in total revenue was attributed to a 12% drop in the U.S. coal revenues and a 6% decline in shipment. In addition, Australian revenues also declined 13.6% due to a 32% decline in realized pricing per ton, partly offset by a 26% increase in Australian shipments.

However, there are some positive factors as well. There are signs of revival in the global metallurgical coal demand. In addition, the rise in natural gas price in the U.S. will also lead to gas-to-coal switching, which in a way will benefit Peabody‘s thermal coal production.

The latest report of the Energy Information Administration (“EIA”) suggests that the total U.S. coal consumption will increase to 954 million short tons (MMst) in 2013 and 970 MMst in 2014 from 889 MMst in 2012. Globally, in the next five years, 450 gigawatts of new coal fired generation is projected to come online. This will increase the annual coal consumption by 1.4 billion tones and will open up new shipment opportunities for the company.

Moreover, Peabody generates a large chunk of its revenues from a limited group of customers. Peabody has long-term contracts with these customers with some scheduled to expire this year. If the company fails to renew contracts on favorable terms it would surely impact profitability. In addition, the upward revision in transportation costs could also impact the profitability of this coal company.

The coal industry is set for a gradual recovery and the companies which warrant a look are Alliance Resource Partners LP (ARLP - Snapshot Report), Alliance Holdings GP, L.P. (AHGP - Snapshot Report) and Alpha Natural Resources, Inc. (ANR - Snapshot Report).

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