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On Mar 26, 2013 we have maintained 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 reported mixed results in the final quarter of 2012, with its top line beating our estimate and the bottom line missing it. The top line was boosted by higher shipments from Australian mines, while the bottom line was affected by higher operating costs.

The latest report of the Energy Information Administration (“EIA”) suggests that the coal industry is poised for a recovery in 2013-14, driven by rise in demand and expected increase in the price of natural gas.  

Total U.S. coal consumption will increase to 941 million short tons (MMst) in 2013 and 955 MMst in 2014 from 889 MMst in 2012. The gradual improvement in demand for coal in the U.S. will help Peabody given its presence in the coal industry. In addition the increase in demand from Asian countries will have a positive impact on shipments.
 
The coal industry on the whole suffered in 2012 due to weak demand and the switch to natural gas for electricity generation. Our estimates for the first and second quarter of 2013 also show a downtrend, with an estimated decline of 120.8% and 93.3% year over year, respectively .

Besides, 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.

The coal industry is set for a gradual recovery and the companies which warrant a look are Alliance Resource Partners LP (ARLP - Snapshot Report), CONSOL Energy (CNX - Analyst Report) and Natural Resource Partners LP (NRP - Analyst Report).

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