Shares of giant coal miner Peabody Energy (NYSE:BTU) fell sharply out of the gate today, losing as much as 18% at one point in morning trading. Although the stock had pared the loss a little by noon EST, it was still lower by a painful 14%. The big news behind that drop was earnings.
The U.S. utility sector has been shifting from coal to natural gas for a very long time. That's partly because natural gas is cleaner than coal, but it's also because natural gas is priced competitively with, if not lower than, coal. This is a fact Peabody specifically noted in its fourth-quarter earnings release, though it also made mention of the other broad shift taking shape in the energy space: An increasing use of renewable energy. Unfortunately, this trend isn't unique to the U.S. market and is taking place the world over. Worse, the headwinds Peabody is facing are likely to get worse over time, not better. And they are having a major impact on the coal miner's business.
Fourth-quarter 2020 revenue, for example, was 34% lower year over year. Full-year 2020 revenue dropped 38%. Peabody's adjusted EBITDA, which takes out certain one-time items like asset impairments, fell roughly 55% in the fourth quarter and 70% for the year. Earnings, which were hit hard by asset impairments in both 2019 and 2020, were disastrous. In the fourth quarter Peabody lost $1.32 per share (actually an improvement over the same period of 2019, when it lost $2.98) and for the full year it lost $19.14 per share (that figure for 2019 was a loss of $2.04 per share). Worse, management didn't provide a particularly compelling outlook for 2021. All in, given the headwinds Peabody is facing and the weak numbers it put up in 2020, it's not surprising that investors were in a selling mood.
Coal is a vital energy source and will likely remain so for many years to come. However, demand has been trending lower and that probably won't change. Most long-term investors will likely want to focus on other industries with more robust prospects. Peabody, meanwhile, has been struggling in the face of the industry's headwinds and has a significant amount of leverage (long-term debt makes up around 60% of its capital structure), making the situation that much worse. Only more aggressive investors should be looking at Peabody today.