Why Peabody Energy Corporation Shares Will Surge to $30

Does this analyst make a good case or is it just more noise from Wall Street?

May 12, 2014 at 4:42PM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Peabody Energy Corporation (NYSE:BTU) climbed about 3% today after Morgan Stanley upgraded the coal producer from equalweight to overweight.

So what: Along with the upgrade, analyst Evan Kurtz planted a price target of $30 on the stock, representing about 60% worth of upside to Friday's close. So while contrarian traders might be turned off by Peabody's sharp rise in recent weeks, Kurtz's call could reflect a sense on Wall Street that its growth prospects still aren't fully baked into the valuation.

Now what: According to Morgan, Peabody's risk/reward trade-off is rather attractive at this point.

"While challenges from gas and regulations remain, the very significant inventory cycle that has faced the thermal coal market since 2012 is ending," said Kurtz. "We think BTU is the best way to play this modest recovery, for five reasons: 1) The company has large exposure to the PRB and ILB markets, our favored basins. 2) We think little value is assigned to the company's met portfolio, which could change as prices tick higher. 3) We see less downside risk relative to peers due to a more manageable debt load and a consistently low-cost portfolio. 4) BTU pays the highest dividend yield in our coverage, with room for eventual increased capital return. 5) The stock has recently lagged other PRB majors like CLD and ACI."

Of course, when you couple Peabody's big debt load and highly volatile nature with its still-significant price run over the past month, I'd hold out for a much wider margin of safety before buying into that bull talk. 

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Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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