Peabody Energy: This Coal Company Can Improve in the Long Run

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Jan 08, 2015

Peabody Energy (BTU, Financial) is struggling due to a soft performance in the recently reported third quarter. This was mainly due to the soft seaborne coal market all around. The market is challenging, but Peabody expects the coal market to rebound in the future. To remain strong in this soft market, Peabody is managing its business carefully. Management is confident of a stronger performance as the market rebounds.

Positive signs

Despite a weak coal market, Peabody is seeing positive signs and opportunities in the seaborne metallurgical coal market. It is witnessing impressive growth in Chinese imports and steel production. India remains a potential market for Peabody as the company is pleased to see a good 20% increase in the imports that clearly indicates the growing demand for metallurgical coal in India. India is a peninsula, and this growth indicates the country’s reliance on the seaborne market. This is a good sign, and it will surely support the rebound in the seaborne market in future.

Moving on to the Seaborne thermal coal market, Peabody is witnessing weak demand is China while on the other hand India still remain a good importer. This is helping the company to offset the crunches that it is seeing from the weak Chinese market in this segment. Among its cream market, Peabody is expecting the Australian exports to be competitive across the globe.

Expected improvements

If we talk about the future coal market, the analysis reveals that though Chinese market is prone to short term fluctuations, the analysts are anticipating that coal will emerge as a dominant energy resource in long term. This a good long term prospect for Peabody. Moreover, Chinese market, which is soft as of now is also growing massively and it is expected that China will continue to rely on coal for its economic development and energy requirements to support its population explosion.

Moving on to India, Indian coal import growth has already increased by 56% so far and the studies reveals that India is growing economically as well. This economic growth is expected to pick-up and drive the coal demand by 20% in India which is expected to contribute majorly to Peabody’s growth as well. In the U.S coal production has increased by 3% and the coal volume is on pace to increase to about 15 million tons in 2014. This is supporting Peabody in this mild weather and increase rail constraints.

Further, Peabody is taking several other initiatives to improve its profitability. The market is soft and to be profitable in this environment, cost reduction is the best alternative the company is looking for. Peabody is now analysing various opportunities to shape its organisation better by reducing the costs.

Conclusion

As a result of the ongoing soft coal market the stock doesn’t exhibit a trailing and forward P/E. As the prospects about the coal markets in future are looking strong the stock can also be a good long term holding as its earnings are growing at a CAGR of 12.08% which is more than the industry average of 9.08%. Keeping the long term coal market forecast and positive signs rising from China and India, Peabody is most likely to be a good performer in future. I would like to suggest the investors, seeking long term gains to definitely include this stock for long term.