Peabody Energy Worth Considering In Your Portfolio for the Long Run

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Feb 17, 2015

Peabody Energy (BTU, Financial) looks like a good long-term investment avenue with the recent recovery in the coal market. As per the International Energy Agency data released of late for annual Medium term Coal Market displays a boost in coal demand. The report sees the coal demand reaching 9 billion tons by 2019.Further the report identifies China as a major consumer for coal that consumes approximately three-fifths of this growth.

The report additionally states that the Asian countries, such as China, India and other Asian countries, will consume more coal in the coming years. This should offset the lower demand for coal in regions such as Europe and the United States. This undeniably creates tremendous growth prospects for Peabody that plans to tap seaborne thermal coal market. The seaborne thermal coal market has relatively a greater growth in Asian countries.

Better times ahead

According to a report , Peabody expects advancement in the thermal coal demand due to continued ramp up of more coal-fired plants by Asian countries. China and India remains two key growth drivers for company for next five years. Peabody has witnessed a rise in imports for Seaborne metallurgical coal market in China due to pick up in growth for steel production. Also, Peabody is pleased with the ease in import growth, which is driving its seaborne thermal coal market in China.

This creates an opportunity for Peabody to address China's coal demand. China's coal imports increased by 13% year-on-year to 327 million tons in 2013 and are expected to further grow in single digits in the coming years.

Moreover, the Chinese government has removed much-needed coal quality restrictions and coal imports tariffs. China has additionally taken crucial steps to enhance emission as it installed more control technologies. It has recently added approximately 150 gigawatts of NOx controls. These moves demonstrate a welcome move by China for coal fleet.

This should certainly support the domestic producers that should now be able to provide affordable energy to support major urban population growth in China associated with Coal. Also, the company expect the Australian coal export to remain very competitive in the global market going forward. Peabody has superior high quality of coal with advance cost profile that should drive growth for its coal in China.

Increasing imports will lead to growth

Peabody expects the thermal coal imports to grow at a healthy pace in India as the country continues to increase coal imports in order to meet domestic demand growth. Also, the economic growth in India is expected to pick up that should drive greater demand for coal in the region. At present India imports about 20% of its thermal coal needs and the majority of its metallurgical coal supplies. In fact, the higher thermal demand in India is offsetting the decline in China.

Peabody expects the coal volume to increase about 15 million tons in the United States in fiscal 2014. Also, it remains on track to improve its productivity in the future. It is seeing great performance from our North Goonyella and Metropolitan longwall mines in Australia. Productions at these mines grew 55% while its productivity grew by 40% year-over-year at both of these mines. Going forward, the company remains focused on increasing uptime and enhancing yields, which should drive its growth in the future.

Peabody continues to improve its productivity. Its U.S. operation had enhanced productivity of 7% while its Australian operation grew more than 20% for the third quarter. It witnessed a 3% increase in the coal generation in the region, and its shipment increased about 2 million tons in the last reported quarter.

Healthy guidance

Peabody projects total coal sales volume to be in a range of 245 to 255 million tons for the full year 2014. Due to tough coal market conditions, the company expects revenues per ton to decrease about 2% to 4% for its U.S. operation. Also, the company is correctly making efforts to reduce its operational costs to support its earnings.

The company has ramped up its cost control efforts and is expecting U.S. operating costs to drop by 1%-3% year-on-year in 2014. Moreover, the company has slashed its capital spending target from $210-$250 million to $200-$220 million for 2014, in efforts to preserve cash. This will certainly improve its operational efficiency leading to growth in the bottom line going forward.

Conclusion

Peabody looks great on the recent rebound in the coal market globally. This should enhance its growth over the next few years. It should benefit from a rise in coal-fired electricity generation in the U.S. and inventory rebuilding by electricity producers, which will strengthen coal demand and support coal prices. Also, the company's diverse and quality assets, with operations in Australia allow it to cater to the strong coal demand of the Asian market.

Also, it is making various strategic initiatives such as reducing costs and enhancing production that should drive its top as well as bottom line performance in the future. The analysts expect its earnings to grow at CAGR of 12.08%, higher than average industry CAGR of 9.08% for the next five years. This indicates strong earnings growth for the stock over the years.