Stock Analysis & Ideas

Peabody Energy: Bullish on Black Sea Coal Disruptions

Peabody Energy (BTU) produces coal, and its stock price has soared in the past month. The forecasting of the war last month caused the price of coal to rise, and the invasion of Ukraine caused coal export disruptions in the Black Sea. The company also beat expectations on its recent Q4-2021 quarterly report, which has added to its rally. I am very bullish on the stock.

Global Coal Export Disruptions

The price of Newcastle coal futures is near record highs. The future contracts of thermal coal exported out of Newcastle, Australia, represent the price trend for seaborne thermal coal. The price has been rising since Indonesia banned coal exports last January for a duration of one month.

The war in Ukraine has further increased the price due to export disruptions in the Black Sea. Coal prices are expected to remain high for some time, even after the war ends.

BTU Stock Experiences Extended Rally

Peabody Energy’s stock price has been trending up for over a year now, climbing ~450% in the past 12 months. Year-to-date, it is up ~105% and, over the last month, it is up 56%. After a pullback in the past few days, BTU stock is about 25% off its 52-week high. 72% of the shares are owned by large institutions. Investor sentiment and trading momentum point towards a continued uptrend.

Peabody Energy Beat Expectations on Q4-2021 Earnings

The company reported revenues of $1.264 billion, representing a 72% increase year-over-year. Peabody Energy cites higher global coal prices as the main driver in its performance. The company showed a gross profit of $554.9 million and an adjusted operating income of $461.7 million. BTU reported a net income of $513 million and adjusted EBITDA of $444.4 million.

The company generated free cash flow of $426.6 million, with which it used to pay down $200 million in senior secured debt. Peabody Energy expects coal prices to rise over the next 12 months and foresees higher coal production from its mines.

Peabody Energy Operations

Peabody Energy mines for coal, both thermal and metallurgical. It has operations in the U.S. and Australia. Its U.S. operations produce thermal coal for U.S. customers. Its seaborne operations in Australia produce both thermal and metallurgical coal. Coal from the seaborne operations is exported to the Asia, Pacific, and Atlantic markets.

During Q4 2021, Peabody Energy mined 4.6 million tons, and for the entire year, it mined 17.3 million tons. The company recently launched a joint venture called R3 Renewables to convert its completed mining sites into green energy sites.

Things Look Very Bullish

The synergies driving Peabody Energy’s stock price are likely to continue, even if the Ukraine War ends. The disruption will take time to restabilize, and the stock price should continue its long-term uptrend. The stock price is undervalued, with a 0.7x forward enterprise-value-to-sales ratio. The stock price uptrend and 2021 financial performance encourage a very bullish rating.

Wall Street’s Take

Turning to Wall Street, Peabody Energy has a Moderate Buy consensus rating, based on one Buy and two Hold ratings assigned in the past three months. At $23.33, the average Peabody Energy price target implies 12.9% upside potential.

Conclusion

Investors, wary of the Ukrainian War causing volatility, have rushed to safe-haven stocks. Coal has been on the list because of the Black Sea export disruptions. The price of coal has been on a one-year uptrend and is currently trading at record highs. Peabody Energy is profiting from the rising prices and supply disruptions.

The company’s stock price has been on a long uptrend and has recently pulled back. BTU’s financial performance for Q4 2021 and Fiscal Year 2021 match the stock’s uptrend. I believe the stock price is undervalued, and I rate the company as very bullish.

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