Peabody Energy Beats Estimates

Peabody Energy Corporation (BTU - Analyst Report) reported its third-quarter 2012 operating earnings of 51 cents per share, beating the Zacks Consensus Estimate of 34 cents. However, the company’s quarterly earnings were lower than last year’s earnings of 90 cents per share.

The year-over-year decline in earnings was due to higher interest expenses, and depreciation, depletion and amortization expenses; partially offset by reduction in selling and administrative charges.

Peabody’s GAAP earnings during the third quarter of 2012 were 46 cents per share versus $1.04 per share reported in the year-ago quarter. The difference between GAAP and operating earnings was due to an impact of 5 cents associated with foreign income tax accounts.

Revenue

In third-quarter 2012, Peabody’s revenue was $2,058.8 million compared with $1,980.6 million in the prior-year quarter, reflecting year-over-year growth of 4%.

The company’s quarterly revenue surpassed the Zacks Consensus Estimate of $1,975 million.

Operational Update

Peabody’s total sales volume in the third quarter of 2012 was 66.6 million tons compared with 62.9 million tons sold in the year-ago quarter. The year-over-year increase of 6% in coal sales was primarily driven by higher sales from Australia, and Trading and Brokerage segments.

During the reported quarter, U.S. revenues increased by 1.1% year over year mainly due to higher realized prices in both the Midwestern U.S. and Western U.S. regions.

In the quarter under review, operating costs and expenses of the company were $1.51 billion, up 7.8% than $1.40 billion in the prior-year quarter.

Rise in cost impacted Peabody’s operating profit, which were $266.5 million versus $385.5 million in the prior-year quarter.

Financial Update

As of September 30, 2012, Peabody had $0.65 billion in cash and cash equivalents compared with $0.8 billion as of December 31, 2011.

As of September 30, 2012, the company’s long-term debt was $6.24 billion versus $6.56 billion as of December 31, 2011.

Peabody’s capital expenditure was $308.4 million in third-quarter 2012 compared with $246.2 million in the year-ago quarter.

Guidance

Peabody expects its full-year 2012 earnings before interest, tax, depreciation and amortization (“EBITDA”) and adjusted diluted earnings per share to be in the range of $1.75 billion - $1.85 billion, and $2.10 to $2.30, respectively. There are several factors like two longwall moves in fourth-quarter 2012, lower volumes from the U.S. operations, higher royalty rates in Australia and lower average realized pricing, which might affect the company’s forthcoming results.

For full-year 2012, the company is targeting total sales of 240 - 250 million tons, including 31 to 33 million tons from Australia, 188 to 192 million tons from the U.S. and the remainder from Trading and Brokerage activities. In addition, Peabody continues to target metallurgical coal sales of 13 to 14 million tons and seaborne thermal coal sales of 11 to 12 million tons in 2012.

The company has reduced its full-year 2012 midpoint capital investments targets by $250 million to $1.0 - $1.1 billion due to the current global environment.

Peer Comparison

Arch Coal Inc. (ACI - Analyst Report), which is competing head-to-head with Peabody Energy, is expected to announce its third-quarter 2012 results on October 26, 2012. As per the Zacks Consensus Estimate, the company is expected to register a loss of 14 cents in third-quarter 2012.

Our View

We believe slow recovery of the U.S. economy, reduction in electricity generation and planned production cutbacks in the manufacturing sector are challenging global coal demand. These factors primarily influenced Peabody to curtail its 2012 capital expenditure budget.

In addition, chances of facing a higher degree of competition from natural gas due to its clean burning nature, over-reliance on a small group of customers for Peabody’s bulk sales and higher transportation costs may create challenges for the company’s forthcoming performance.

Peabody Energy Corporation currently has short-term Zacks #5 Rank (Strong Sell rating).

St. Louis, Missouri-based Peabody Energy Corporation is a private sector coal mining company. The company has interests in 29 coal operations located in the United States and Australia, and has joint venture interests in a Venezuelan mine.