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Bear of the Day: Peabody Energy (BTU)

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Company Overview

Zacks Rank #5 (Strong Sell) stock Peabody Energy ((BTU - Free Report) ) is a preeminent coal producer engaged in the mining, processing, and the sale of coal through 17 operations, mainly in the United States and Australia. Peabody Energy mostly mines and processes thermal coal, which is utilized for power generation, and metallurgical coal, which is utilized in steel production.

Global Coal Demand is Expected to Decline

In 2020, Coal stocks like BTU, Arch Resources ((ARCH - Free Report) ), and Warrior Met Coal ((HCC - Free Report) ) were on the brink of collapse as demand plummeted due to the COVID-19 pandemic, and investor concerns about investors attempting to replace the entire industry with clean energy alternatives. Since then, several coal companies have gone bankrupt. Nevertheless, the ones that survived enjoyed recovering earnings and soaring stock prices.

However, despite the impressive recovery in coal demand, the International Energy Agency (IEA) sees global coal demand leveling off and cooling over the next few years and into 2026. The late 2023 report marks the first time the IEA has predicted a drop in global coal consumption. The reasons for the lower expectations include:

U.S. & EU Demand to Slow:

Though demand in developing nations like India and China is growing in the single digits, slowing demand in the European Union and the United States will likely outweigh the demand.

Global Demand Seen Slowing Regardless of Clean Energy Agenda

The IEA expects global demand to fall by 2.3% by 2026,“even in the absence of governments announcing and implementing stronger clean energy and climate policies. This decline is set to be driven by the major expansion of renewable energy capacity coming online in the three years to 2026.”

China Renewable Energy Growth

China is responsible for the most coal demand globally. However, the IEA sees demand falling as clean energy solutions are rolled out in the country.

Relative Weakness

Behind market direction, industry group health is the most critical driver of individual stocks. Currently, the Coal industry is ranked in the bottom 2% (245 out of 251) of all industries tracked by Zacks. Meanwhile, BTU is exhibiting concerning relative weakness compared to  its peers. BTU is -8.4%, while the coal industry as a whole is -3% year-to-date.

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Image Source: Zacks Investment Research

Revenue Growth is Slowing

Fundamentals must grow for coal stocks to maintain their momentum. Unfortunately, BTU is experiencing slowing revenue growth.

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Image Source: Zacks Investment Research

Inconsistent EPS Surprise History

BTU has missed Zacks Consensus estimates in three out of the past four quarters – a signal that earnings are stabilizing.

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Image Source: Zacks Investment Research

Bottom Line

Slowing demand, underperformance, and a weak industry group are reasons to avoid this coal producer.

See More Zacks Research for These Tickers

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Peabody Energy Corporation (BTU) - free report >>

Warrior Met Coal (HCC) - free report >>

Arch Resources Inc. (ARCH) - free report >>

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