Peabody Misses, Gives Guidance

Peabody Energy Corporation (BTU - Analyst Report) reported fourth-quarter 2011 earnings of 98 cents per share, falling short of the Zacks Consensus Estimate of $1.31. However, the company’s profits were 11 cents ahead of last year’s earnings of 87 cents, driven by higher global prices and demand for coal.

Peabody’s adjusted earnings for the full year 2011 were $3.76 per share, falling below the Zacks estimate of $3.97. However, the company’s earnings grew 20.9% from the 2010 level of $3.11 per share.

Revenue

Peabody’s quarterly revenue, at $2.25 billion, increased 25.7% year over year on the back of an 11.5% rise in US Mining revenue. The upside was due to higher average pricing and increased volumes besides 7.7% growth in Australian revenue.

The company’s revenue for the quarter fell short of the Zacks Consensus Estimate of $2.31 billion.

For the full-year, Peabody recorded revenue of $7.97 billion, up 18.3% year over year. A 22% rise in Australian revenue bolstered the top line. The Australian results were driven by higher volumes from Wilpinjong and Millennium mines and two months of contribution from the acquired Macarthur mines. However, these positives were marginally offset by the impact of first quarter flooding and geologic issues at the North Goonyella Mine in the third and fourth quarters of the year.

The company’s revenue for the fiscal year failed to surpass the Zacks Consensus estimate of $8.11 billion.

Operational Update

Peabody’s total sales volume in the quarter was 68.5 million tons, slightly ahead of prior year levels. Sales volumes in 2011 reached a high of 250.6 million tons beating last year’s record sales of 244.2 million tons.

Quarterly sales volumes were driven by the 10.2% year-over-year rise in Western U.S. mining output, offset marginally by a 7.5% dip in Australian volumes. Similarly, fiscal 2011 sales volumes were driven by 6% growth in Western U.S. mining operations besides sales of 0.9 million tons from Macarthur mines.

In 2011, Peabody registered a 2.6% rise in sales volumes. In addition to expanding volumes, the top line also gained from higher realized prices for the coal shipped. Revenue per ton, in the U.S., increased 3.3% year over year to $21.49, while revenues per ton in Australia rose 26.5% to $119.93.

Peabody’s earnings before interest, tax, depreciation and amortization (EBITDA) in fiscal 2011 were $2.12 billion, improving 15.8% from $1.83 billion in 2010. Fiscal 2011 operating profit climbed 17.6% to $1.59 billion from $1.35 billion a year ago.

Financial Update

As of December 31, 2011, Peabody had $0.8 billion in cash and $0.45 billion in short inventories versus $1.3 billion in cash and $0.32 billion in short inventories as of December 31, 2010.

Long-term debt of the company as of December 31, 2011, was $6.55 billion versus $2.7 billion as of December 31, 2010.

Peabody’s capital expenditure (excluding acquisitions) in the fourth quarter was $256.9 million bringing the full year spending to $903.0 million.

Guidance

Peabody expects first quarter 2012 EBITDA to come in the range of $500 million to $600 million and adjusted earnings per share in the band of 50 cents to 75 cents. However, the company cautioned that first quarter results will be impacted by the timing of shipments in Australia, as well as scheduled longwall moves at the Twentymile Mine.

For full-year 2012, the company is targeting total sales of 245 – 265 million tons, including 33 to 36 million tons from Australia, 195 to 205 million tons from the U.S. and the remainder from Trading and Brokerage activities.

We note that Peabody continues to advance multiple organic growth projects in Australia and the U.S.  The company expects to spend an estimated $1.2 billion to $1.4 billion on capital expenditures in 2012, 67% of which will be dedicated to new mines, expansion and extension projects.

Peabody has plans to further expand its Australian operations and will invest in the range of $400 million to $425 million in the next two years. The expenses will be directed toward converting the Wilpinjong and Millennium mines in Australia from contract mining to owner operations.

Peer Comparison

Missouri based Arch Coal, Inc. (ACI - Analyst Report), competing head-to-head with Peabody Corporation, is expected to announce its operating earnings for fiscal 2011 on February 10, 2012. The company expects operating earnings per share for 2011 to be in the range of $1.00–$1.40.  Analysts polled by Zacks expect Arch Coal to clock earnings of $1.18 per share.

Our View

Though the company disappointed our expectations in 2011, fiscal 2012 can turn out to be a different story provided Peabody succeeds to tap the increased global demand for metallurgical and thermal coal. Higher demand is expected to issue from Asian countries as well as Germany.

At present, the company’s higher debt burden and interest expenses are causes of concern. Peabody had to issue notes to fund a portion of the Macarthur Coal acquisition cost, which significantly drove the debt levels.

The company also faces steep competition from natural gas producers for power generation. It also runs geo-political risks as a significant portion of sales comes from international operations. Apart from that the long-term viability of the company depends upon its capacity to continuously acquire and develop economic coal reserve.

Peabody Energy Corporation currently retains a Zacks #4 Rank, which translates into a short-term Sell rating, conforming with our long term Underperform rating on the stock.

St. Louis, Missouri based Peabody Energy Corporation is a private sector coal mining company. The company has interests in 28 coal operations located in the United States and Australia, and has joint venture interests in a Venezuelan mine.

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