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Why Coal Stock Peabody Energy Is Bouncing Back After a Sharp Drop

By Neha Chamaria – Oct 28, 2021 at 11:27AM

Key Points

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The markets heard what analysts said, not what Peabody Energy said.

What happened

Coal stock Peabody Energy (BTU 0.25%) went on a wild ride this morning, crashing 10% right when the markets opened only to rebound sharply. As of 10:30 a.m. EDT, the stock was down only about 1%.

It appears the market quickly realized its knee-jerk reaction to the coal miner's third-quarter numbers was unwarranted.

So what

Here are some notable numbers from Peabody Energy's third-quarter earnings report released Thursday morning:

  • Revenue up 1% year over year to $679 million
  • Net loss of $44.2 million versus a net loss of $67.2 million in the year-ago quarter
  • Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) up more than threefold year over year to $289.1 million
  • Cash and equivalents balance of $587 million, down 28% year over year
A miner working in a mine.

Image source: Getty Images.

None of those numbers should have come as a surprise given that Peabody Energy had already announced preliminary Q3 numbers earlier in the month and reported in line today.

Yet, the stock dropped sharply early today after headlines screamed how Peabody Energy had hugely missed analysts' estimates on both its top and bottom lines. Simply put, the stock was punished because analysts didn't adjust their estimates even after the company announced preliminary numbers. Talk about overreaction!

Now what

It's not that Peabody Energy isn't benefiting from the dizzying rally in coal prices: Its coal sales crossed $900 million last quarter to levels not seen in nearly seven quarters.

However, the company's revenue came in much lower as it includes gains and losses on coal hedges and coal trading contracts under revenue. In Q3, Peabody Energy reported a $238.4 million net loss on hedges contracted earlier for thermal coal produced at its Wambo underground mine in Australia, thanks to surging coal prices: From around $80 per metric ton at the start of the year, coal prices hit an all-time high of $269.5  per metric ton on Oct. 5.

That also explains the rise in Peabody Energy's adjusted EBITDA, which excludes the impact of gains and losses, among other things.

So far this year, though, investors have bet on coal prices. But with China now stepping in to bring down coal prices, investors in Peabody Energy will want to see the company bring in positive cash flows, at least while coal prices remain high, to gain conviction in its future.

Neha Chamaria 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.

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