Peabody Energy Is Having a Fire Sale

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those rarified investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy-one-get-one" sale on their stocks.

Less than a year ago Peabody Energy (NYS: BTU) was trading for more than twice the price it currently is, but an unrelenting attack on the coal industry by the current administration has brought the coal miner low. Although it's bounced 31% from its nadir and seems to be on a comeback trail, you'll naturally want to do more due diligence before buying in. Still, this might be an opportunity to pick up a quality stock at a severe discount.

Peabody Energy snapshot:

Market Cap $6.4 billion
Revenues, TTM $8.3 billion
1-Yr. Stock Return (50.5%)
Return on Investment 7.4%
Dividend & Yield $0.34/1.43%
Est. 5-Yr. EPS Growth 18.3%
52-Week High $47.36
Recent Price $23.70
CAPS Rating ****

Source: FinViz.com

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

A dirty word
When "clean energy" alternatives hold sway in policy-making decisions, "dirty" industries like coal are given short shrift. The natural gas industry is slowly grinding coal under its heel despite prices for both being at historically depressed levels. The difference is that there are incentives for the use of natural gas; no one's pushing for more coal use, so we see utilities converting from coal-fired plants to natural gas even as drillers are abandoning the field for oil and liquids.

According to the Energy Information Administration, 27 GW of coal-fired capacity from 175 generators will be retired over the next five years, a stunning amount that's four times greater than the amount retired over the previous five-year period.

Weak pricing and higher costs caused BHP Billiton (NYS: BHP) to plan to shut one of its mines next month, while Xstrata is reorganizing its coal business. The only real hope for the coal industry is China, which doesn't have the same animus toward it as the U.S. Yet, with an economy coming in for a much harder landing than expected, that may be hard to pull off.

But, on the heels of Europe's proposed bond buyout and the Fed readying another round of quantitative easing, China announced a new $125 billion stimulus plan for the country's infrastructure. The make-work proposal had steel giants like AK Steel (NYS: AKS) jumping on the news, and coal miners including Peabody, Arch Coal (NYS: ACI) , and Walter Energy (NYS: WLT) rising on the hopeful news. Yet there's an awful lot of backlogged inventory in both industries to work through before new demand will be felt. Even then spending trillions to get out of a recession hasn't proved to be a successful elixir so far, either here at home or in Europe.

Worse, metallurgical coal pricing isn't about to get any better with one analyst saying it could hit $175 a ton in the fourth quarter, 17% below its current price. Even with BHP, Xstrata, and others working to shore up the supply part of the equation, demand will be weak regardless of what China's doing.

Peabody's second-quarter earnings saw revenues come in flat and profits fall 28% from the year-ago period. Domestic mines are laying off workers, Patriot Coal was forced into bankruptcy, and Arch turned last year's $76 million profit into a current-year $22 million loss. The industry is anything but a picture of health, and the "supercycle" in coal that Peabody had been counting on didn't materialize.

As the largest U.S. coal producer, Peabody should survive the tumult better than most, but that doesn't mean it will thrive in the current regulatory environment. I had rated the coal miner to outperform the markets earlier this year on the assumption that most of the bad news was factored in, and though it's still down 10% from the time I made that call (compared to a 5% jump in the S&P 500), I'll be maintaining that rating despite the ugly metrics the industry presents. At just seven times earnings it seems cheap enough to wager that it can still stand tall. But let me know in the comments section below if you think Peabody Energy will serve simply as the canary in the coal mine for the rest of the industry.

Have half a mind
If coal and natural gas leave you cold but you're still looking for an energy play to heat up your portfolio, then Motley Fool analysts think they've found an energy stock with all the upside you need. You can read about it in their new free report, "The Only Energy Stock You'll Ever Need," that you can get for free by clicking here.

The article Peabody Energy Is Having a Fire Sale originally appeared on Fool.com.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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8 Comments

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Gumby

I still appauld the closing of coal powerplants because they were uneconomical to retrofit for pollutin controls.. It doesnt necessasrily mean that we should not build new powerplants with far better pollutin controls cheaper. it is a dangerous thing to overdepend on nat gas as many utilites is currently switching to from coal... Remember, nat gas prices was once $10 but is now down to $3. It doesnt mean it wont go back up to $10 again.. $10 nat gas can throw our economy back into another rececession... EPA ought to ban firewood now!! Our health costs is sprialing out of controls , thanks to popular uses of firewood... Nobody is doing any studies on the health impacts of firewood smoke at all. People tend not to blame firewood for their illnesses... because firewood is so popular !! Who , in his right mind, would question the use of firewood?? I would dare question it myself because I am not afraid of YOU!

September 12 2012 at 4:42 PM Report abuse rate up rate down Reply
Gumby

We dont think firewood is dirty becuase it smells so good ! This is the real tragedy!

September 12 2012 at 4:36 PM Report abuse rate up rate down Reply
Gumby

Because of growing popularity in firewood, EPA got somewhat misguided by blaming coal powerplants enitrely for global climate changes while ignoring millons of spanking new wood stoves being installed in homes every year without any pollutin controls whatsoever!! We are running in circles !!

September 12 2012 at 4:35 PM Report abuse rate up rate down Reply
Gumby

Because of growing popularity in firewood, EPA got somewhat misguided by blaming coal powerplants enitrely for global climate changes while ignoring millons of spanking new wood stoves being installed in homes every year without any pollutin controls whatsoever!! We are running in circles !!

September 12 2012 at 4:35 PM Report abuse rate up rate down Reply
Gumby

Because of growing popularity in firewood, EPA got somewhat misguided by blaming coal powerplants enitrely for global climate changes while ignoring millons of spanking new wood stoves being installed in homes every year without any pollutin controls whatsoever!! We are running in circles !!

September 12 2012 at 4:34 PM Report abuse rate up rate down Reply
Gumby

Back in the sixties, firewood was not really popular except up in the snowy mountains because nat gas or electricity was so plentiful back then. we relied on tradtional furnaces to heat our homes.. Now we are pretending to be mountaineers living in the suburbs or even big cities by insisting on using firewood as if it is a cool thing to do... Air polllution got worse than back in the sixites when we drove V8 land yachts with huge tailpipes!! Firewood smoke is so dirty that it is the leading air pollutoin already!! not Coal! Coal is so strictly controlled for pollution already... It is just politics because Republicans ar ethe ones running coal power plants... LIberals burn firewood ! What an irony!

September 12 2012 at 4:32 PM Report abuse rate up rate down Reply
Gumby

I dont consider coal as dirty because your firewood is far dirtier!!! EPA is trying to encourage people to switch to gas stoves away from firewood ... Sure, there is EPA certified wood stoves but it is still far dirtier than your local coal powerplant by a whooping margin ! Enjoy your coughs!! Billons of people on Earth still rely on firewood or cow bricks for cooking or heating, hey we will be far better off with more coal powerplants for those indigenious people that get electricity for the first time ever! .. They will live longer .. Eventually, we will do away with coal probably 50 years later when clean energy technologies get far more powerful and economical.. I am not saying that we dont need much more clean energy but we will still need coal as we continue to make great progress on clean energy along the way. Time is of essence as you very well know about global climate changes... Just forget firewood now which is a great start !

September 12 2012 at 4:28 PM Report abuse rate up rate down Reply
Leslie Glustrom

Richard--You've stated that coal is at "historically depressed levels" in terms of price. Here is your sentence.

The natural gas industry is slowly grinding coal under its heel despite prices for both being at historically depressed levels.

I don't think this is true for either commodity. Natural gas has clearly been lower and coal costs have been rising about 8% per year in the US since 2004. The easily accessible coal has already been mined. The coal companies are seeing steadily increasing production costs, thinner (or non-existent) margins and dramatic drops in profit.

There is detailed information on US coal costs at www.cleanenergyaction.org. You'll find a report detailing increased coal costs in every state that uses coal.

Leslie Glustrom
303-245-8637
lglustrom at gmail

September 11 2012 at 9:28 PM Report abuse rate up rate down Reply