Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Peabody Energy Stock Surged 31% Wednesday and Is Down 9% Today

By Jason Hall – Feb 6, 2020 at 12:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A deal with its biggest shareholders has investors feeling upbeat about the coal miner's prospects, before the "it's a coal miner" reality kicked in.

What happened 

Shares of coal miner Peabody Energy (BTU -1.01%) were on fire on Wednesday, gaining more than 31% at one point before closing with a strong 26% gain. However, today the market has reversed course, with shares down more than 9% in early afternoon trading.

Wednesday's surge came on the heels of two announcements. The first was the company's first-quarter financial and operating results, which are usually the catalysts when a stock moves this much on a single day.

In Peabody's case, however, it was the second announcement that seems to be providing the majority of investors' optimism: The company reached an agreement with Elliott Management, a fund manager with more than $40 billion in assets under management that is by far Peabody's biggest shareholder.

So what

Miner with a handful of coal.

Image source: Getty Images.

Under the agreement, Peabody announced it was appointing three new members to its board of directors: two high-ranking Elliott Management executives in Dave Miller and Samantha Algaze, along with coal industry veteran Darren Yeates. The press release also said they had agreed to appoint one more new board member with extensive mining operations experience, "to be jointly identified" by the two companies. 

The two parties also entered into a cooperation agreement that defines Elliott's ability to appoint board members, and creates additional guidelines that should help Peabody and Elliott move forward in a mutually beneficial manner. 

Now what

This is a decidedly good move for Peabody, which is now fully aligned with its biggest shareholder. It should also prove to be a positive for Elliott and its investors, and for common shareholders as well. Moreover, Peabody has taken steps to improve its business and balance sheet. Despite the significant GAAP (generally accepted accounting principles) losses it just reported, Peabody generated positive operating cash flow and modest free cash flow last quarter as most of its losses were related to noncash items. 

With that said, this is still a giant coal miner, with all the challenges that entails. While there's some optimism in the U.S. with the Trump Administration's deregulatory actions, natural gas remains the preferred fuel for power utilities for a litany of reasons that less regulation won't change. Moreover, the global thermal coal market is likely to see constant ongoing pressure, because the rest of the world is making carbon emissions reduction a priority. 

Put it all together, and while Peabody has a path forward and seems likely to remain a viable business for years to come, investors would likely enjoy better returns by avoiding the entire sector. A better place to look? Renewable energy stocks offer a way to gain exposure to similar end markets as Peabody does, but with far better prospects for long-term profits. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
BTU
$24.60 (-1.01%) $0.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.