Time to 'Be Greedy' with Peabody Energy?
Legendary investor Warren Buffett has always counseled to "Be fearful when others are greedy, and greedy when others are fearful."
Investors have certainly been "fearful" of the coal sector. The exchange traded fund for coal, Market Vectors Coal (NYSE: KOL), is off nearly 20 percent for the year. Stocks such as Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) are also down sharply for 2013. But Peabody Energy (NYSE: BTU) just surprised Wall Street in beating forecasts for the most recent quarter: as a result, its share price is up more than 7 percent for the week.
What looks bullish for the future income stream of Peabody Energy is the export market to China and India, the two most populous nations in the world and the biggest users of coal. Despite the boom in natural gas and oil due to fracking, coal is still the primary source of energy in the world, especially in developing countries.
That will not change anytime soon, as oil and natural gas require massive, expensive pipeline networks to carry the fuel from the ground to the office building or the home. Coal, by contrast, can be hauled in a pickup truck or toted around in a sack. As proof of the increasing demand, coal imports in India are up 37 oercent this year.
Domestically, however, the coal industry is in trouble.
The "war on coal" being waged by the Obama Administration has had its casualties, with Patriot Coal filing for bankruptcy last year. The market has been even more lethal: falling natural gas prices have resulted in many utilities switching from thermal coal. That has been particularly crippling for Arch Coal, which relies heavily on the thermal coal market. Alpha Natural Resources is shifting away from thermal coal to met coal, due to the market pressure.
Peabody Energy delivered four million tons of met coal, 3.1 million tons of thermal coal for export and 1.9 million tons of domestic coal in the third quarter. The steel industry of China is a huge market for the met coal of Peabody Energy. Chinese steel production rose more than 15 percent in August, due to massive infrastructure spending by Beijing. When China was booming, Peabody Energy was trading at nearly $90 a share in June 2008.
For 2013, though, Peabody Energy is down by more than 27 percent.
But Peabody Energy is rebounding: In addition to beating Wall Street estimates, it was recently upgraded by BMO Capital Markets with the target price lifted to $23. It just increased its credit facilities, which is another bullish sign. Peabody Energy is now trading around $19 after the recent rally. For shareholders, there is a dividend yield of around 1.8 percent, about average for market. The entire coal sector will not be going out of business, no matter what comes from The White House. Peabody Energy looks to be a survivor, no matter how "fearful" investors are of the coal industry.
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