Coal miner Peabody Energy Corporation (BTU) will release its third quarter 2010 financial results on Tuesday, October 19, 2010. The Zacks Consensus Estimate for the third quarter is 91 cents, representing annual growth of 86.69%.
Looking back, we note that Peabody has consistently outperformed the Zacks Consensus Estimates in the trailing four quarters. The average earnings surprise is 47.75%.
Second Quarter Highlights
Peabody Energy posted encouraging results in the second quarter of 2010. The company’s second-quarter earnings of 69 cents per share were above the year-ago earnings of 50 cents. Results also rose higher than the Zacks Consensus Estimate of 64 cents, representing an earnings surprise of 7.81%.
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.
Peabody expects its third quarter 2010 EBITDA at $475 – $550 million and adjusted EPS in the 75 cents – $1.00 range. For full year-2010, the company has raised the lower-end of its expected EBITDA target to $1.7 – $1.9 billion with adjusted earnings of $2.60 – $3.15 per share. Higher metallurgical and seaborne thermal coal prices are anticipated to benefit Peabody in the second half of 2010.
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.
Estimate Revision Trends
Despite the robust guidance for the third quarter and fiscal 2010, estimates over the last 60 days have slightly decreased for the next two quarters and also for 2010 and 2011. Negative estimate revisions mainly centered upon fears of a negative impact of the forthcoming Environment Protection Agency (EPA) regulations and the expectation of sustainably low natural gas prices.
The Zacks Consensus EPS estimate for the third quarter of 2010 is 91 cents, within the company’s guidance range. For 2010 and 2011, the Zacks consensus estimates are $3.03 and $4.56, respectively.
Agreement
Estimate revision trends for the third quarter were on the negative side with 4 analysts each (out of 23) lowering estimates in the last 30 and 7 days.
The overall trend in annual estimates was no exception either. Three analysts (out of 21) lowered their estimates for 2010 in the last 30 days, while four analysts lowered estimates in the last 7 days. Estimate revisions for 2011 had 4 analysts (out of 23) lowering estimates in the last 30 days, with one analyst raising estimates in the same period. In the last 7 days, 4 analysts moved estimates down while there were no upward revisions.
Magnitude
Based on the number of estimate revisions in the last 7 days, estimates slipped for the third quarter of 2010 by 3 cents. Estimate revisions in the last 30 days also showed a 3-cent dip in estimates for the period.
Over the last 7 days, annual estimates were also down by 3 cents each for 2010 and 2011. Over the one-month period too, estimate revisions point to a 3-cent decline for both 2010 and 2011.
Our Take
Peabody Energy is the world’s largest private sector coal mining company, owning majority interests in more than 30 mines in the U.S. and Australia. The company’s coal fuels about 10% of all U.S. and 2% of worldwide electricity generation.
Peabody’s Australian leverage provides it an edge over competition due to growing demand for its high bituminous (Btu) content Australian seaborne thermal and metallurgical coal. The company continues to expand its Australian operations – recent expansion at the Wilpinjong thermal coal mine in New South Wales – aiming to increase Australian thermal coal production volumes to 35-40 million tons by 2014. Additionally, the company enjoys the advantages of proximity to the major Pacific markets.
Going forward, Peabody also expects to benefit from its large production and reserve position in the Powder River Basin (PRB) and Illinois Basin, which are safe, low-cost regions that will continue to penetrate the Eastern U.S. markets.
Based on industry comments, we believe domestic coal producers with leverage to the PRB and the Illinois basin will show promising growth in the future. Furthermore, the overall trend in thermal coal prices has been favorable, driven by improvements in demand from the domestic and international markets and reduced stockpiles.
We believe Peabody stands to benefit from these positive sentiments on thermal coal producers, with an emphasis on PRB producers. We maintain our Neutral recommendation on Peabody, which is supported by a Zacks #3 Rank (Hold).
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