Why Is Peabody Getting Killed By Reverse Split News?

• Peabody Energy’s stock is down more than 9 percent on Thursday after approval of a reverse split
• Peabody and rival Arch Coal are two of the largest coal names struggling to avoid bankruptcy
• Both companies currently sport debt-to-equity ratios of greater than 3.5

Coal producer Peabody Energy Corp BTU shares are plummeting on Thursday after the company announced that its shareholders have approved a 15-1 reverse stock split. The coal industry has been hit particularly hard during the current commodity pricing slump, but the most recent blow is a tough one for Peabody shareholders.

Slew of bankruptcies
Coal investors have endured a minefield of bankruptcies in recent years. Alpha Natural Resources, the second-largest public coal company at the time, filed for Chapter 11 just last month. Alpha joined the bankruptcy ranks of Walter Energy, Patriot Coal, James River Coal and numerous other smaller coal names that have filed for bankruptcy during this downturn.

Staying above water
The financial health of two of the largest remaining coal names, Peabody and rival Arch Coal Inc ACI remains highly suspect. Both companies currently sport long-term debt-to-equity ratios of greater than 3.5 and have not been generating any profits at current coal prices.

Arch’s stock plunged more than 11 percent earlier this week as the company’s efforts to restructure its debt were met with resistance.

Market reacts
The market seems to be viewing Peabody’s reverse split as an act of desperation. The stock is trading down more than 9.0 percent on Thursday. Arch is also down more than 2.6 percent on the day. Both stocks are now down more than 85 percent in the past year.

Disclosure: the author holds no position in the stocks mentioned.