Peabody Energy: Earnings Preview

Peabody Energy (NYSE: BTU  ) posted earnings of $0.33 a share in the second quarter, up from a loss of $0.09 in the first quarter. However, the second quarter could well be the high-water mark for the year.

Continued weak markets
Although there are positive trends taking shape in the coal market, that hasn't translated into improved demand and pricing. For example, increased natural gas prices have led utilities to switch back to coal. That's good, but utilities are generally burning through their coal stockpiles rather than ordering new coal. And, metallurgical coal demand in Asia remains strong, but continued oversupply has kept prices low.

So there remain notable headwinds, which helps explain why Peabody's third quarter guidance was for something between a loss of $0.16 a share and a profit of $0.09. Either way, investors should expect lower sequential earnings. And, with the company's 2013 production in the United States largely accounted for, cost savings will likely be the determining factor.

Cost cutting
That's a broader trend throughout the entire mining industry. For example, mining giant BHP Billiton (NYSE: BHP  ) , whose fiscal year ended in June, was able to trim costs by $2.7 billion last year through a combination of reduced capital spending, a lower headcount, and efficiency improvements. Those efforts allowed the company to remain solidly profitable for the year.

Peabody, for its part, has followed suit, reducing costs by 6% in the second quarter. That, however, probably won't be enough to offset reduced U.S. demand and year-over-year price declines. But, it should help to soften the blow. In fact, the company took another $100 million out of its capital spending program, the benefit of which should be felt in the third and fourth quarters.

A swing country
Peabody's Australian operation is another area to watch. The weak Aussie dollar has made coal from that market more competitive globally. In fact, Alpha Natural Resources (NYSE: ANR  ) noted that "most U.S. thermal coal production, and essentially all CAPP thermal coal production, [is] uneconomic" to export. The same is true on the met side of the business. Australian coal mines are a big reason for that.

U.S.-based companies like Alpha have no choice but to suffer through this trouble spot. Globally diversified Peabody, however, doesn't; Australian met operations account for about 27% of the top line, with Aussie thermal at around 16%. Although prices are down across the board, Peabody's volume out of the land down under has been favorable. That should help support the company's bottom line somewhat in the third quarter.

Plodding along
In the end, Peabody is just trying to make it to the other side of the coal market downturn in as positive a position as possible. That's another broad industry trend, with competitors like Walter Energy (NYSE: WLT  ) and Arch Coal (NYSE: ACI  ) focusing on their balance sheets and reassuring investors after both made expensive and, in hindsight, ill-timed acquisitions in the met-coal space. That pair had to trim dividends, with Walter doing so after reworking its credit lines.

While Walter and Arch have been talking about their balance sheets and cash assets, Peabody is in relatively good position to survive this market. For example, it hasn't had to trim its dividend. And, it has lost money in only two of the last five quarters. Alpha lost money in each of those quarters, Arch and Walter in four of the five.

Lower earnings but upbeat trends
In the end, you should expect a relatively weak quarter from Peabody. However, that isn't what's most important. Watch for the industry trends that management highlights, since they will be the indication that the end of the coal market downturn is approaching. Peabody should be one of the best positioned when the upturn takes hold.  

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  • Report this Comment On October 15, 2013, at 11:40 AM, JohnB92882 wrote:

    Sorry Rubin,

    Your perspective of Peabody and the Asian coal market is out-of-date.

    In my opinion, China has started to gear up their economy. Use of coal and iron, as well as prices; and Peabodys management & financials relect positive change.

    I expect an impressive Q3 EPS later this week.

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