Following the earnings release of Peabody Energy Corp. (BTU) on July 20, 2010, analyst sentiments are largely mixed. Peabody’s strong second quarter results were a function of the company’s global presence, with superior strength at its U.S. and Australian mining platforms, together with underlying cost controls and improved pricing.
Earnings Review
Peabody Energy reported second-quarter earnings of 69 cents per share, higher than the Zacks Consensus Estimate of 64 cents and the year-ago profit of 50 cents. Results were better than expected due to improved pricing, coupled with higher volumes at both the U.S. and Australian operations.
Peabody’s quarterly sales, at $1.66 billion, increased 23.8% year over year, on the back of a 49% rise in Australian revenues per ton. The company’s U.S. operations also performed fairly well, with revenues almost in line with last year. However, sales came slightly lower (by 2.2%) than the Zacks Consensus Estimate $1.70, pulled down by lower volumes in the company’s Midwest U.S. mining operations.
We have discussed the quarterly results at length here: Peabody’s Profits Rise
Agreement of Analysts
The overall trend in annual estimates is mixed, with 9 out of 20 upside revisions for fiscal 2010 in the last 7 days. Only 5 analysts lowered their 2010 estimates in the last 7 days. In the last 30 days, analyst revisions were even, with 7 analysts raising estimates and 7 lowering them.
For 2011, estimate revisions though mixed drifted to the negative side. There were 5 (out of 23) upward revisions in the last 7 days, while 6 analysts lowered estimates. Over the 30-day period also there were 4 upward revisions versus 8 downward revisions.
Magnitude of Estimate Revisions
Based on the number of estimate revisions over the last 7 days, annual estimates were down by a penny for 2010 and by 3 cents for 2011. Over the one-month period, estimate revisions point to a 3-cent decline in the 2010 estimate while figures for 2011 slipped by 10 cents.
Maintain Neutral
Peabody’s growth story continues to be linked to its leverage to the emerging Asia-Pacific markets, led by China’s demand for energy – particularly coal, and the recovery of steel production in developed economies such as Japan, South Korea and Taiwan. These markets are expected to be the demand drivers in both the near and long term. The company estimates Japanese steel production to increase over 20% in 2010, while thermal coal demand is already above 2009 levels.
Leverage to these markets provides the company an edge over competition due to growing demand for its high Btu content Australian seaborne thermal and metallurgical coal. Looking ahead, Peabody expects Pacific thermal coal demand to rise more than 10% in 2010 while global metallurgical coal imports may soar nearly 30%.
Furthermore, the company continues to see improving demand in the domestic front as the economy continues to recover. The U.S. witnessed about 6% growth in electric generation and also saw greater-than-expected reduction in stockpiles during the quarter. This has resulted in soaring coal prices, particularly in the Powder River Basin (PRB) and the Illinois Basin.
However, Peabody observed declines in coal production at the Appalachia region, which is the major coal producing region in the U.S. This is expected to serve as a major drawback for companies having greater leverage to this region.
Going forward, Peabody expects to benefit from its large production and reserve position in the PRB and Illinois Basin, which are safe, low-cost regions that will continue to penetrate Eastern U.S. markets. Furthermore, the company is strengthening its position in Australia, where it expects volumes to 40 million tons by 2014.
For 2010, the company is targeting total sales of 240 – 260 million tons, including trading and brokerage volumes. Australian sales are expected to be 27 – 29 million tons, while U.S. volumes are expected to be 185 – 195 million tons.
With the growing volumes in Australia, greater leverage to PRB and Illinois region and improved pricing, we believe Peabody has the potential to capitalize on the Asian coal demand. However, uncertainty surrounding the depth and span of the current global downturn persists. Although recent rhetoric may suggest a bottoming or stabilization of markets, definitive signs of recovery have yet to be seen.
Consequently, we remain on the sidelines, retaining the Zacks #3 Rank for the stock, supported by our Neutral Recommendation.
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