Our long-term recommendation for Peabody Energy (BTU) is Neutral, indicating that the stock will perform in line with the broader market. We like the company due to its leverage to emerging Asian markets (especially China and India) as these will be the drivers of demand-growth in both near and long term. Peabody’s Australian operations will allow the company to obtain higher prices and better margins, besides providing a diversified platform for long-term growth.

Peabody has sufficient liquidity with $446 million of cash in hand at the end of the second quarter of 2009. This will help the company to explore earnings accretive investment opportunities in high-growth markets, particularly at a time when valuations are depressed.

However, Peabody’s profitability in recent quarters got affected by lower demand of coal. Decreased demand for steel and electricity caused by a global slowdown has pushed coal prices down from its highs of 2008. The Energy Information Administration (EIA) estimates that the U.S. coal consumption will be down 2.6% in 2009, while electricity demand will shrink 1.6%.

Uncertainty surrounding the depth and span of the current global downturn still remains. Although recent rhetoric may suggest a bottoming or stabilization of markets, definitive signs of recovery are yet to be seen. Going forward, Peabody’s performance will depend upon how fast coal prices recover following the global economic recovery.

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