Why Peabody Earnings Could Turn Into Losses This Quarter

Peabody Energy (BTU) will release its quarterly report on Thursday, and investors are bracing for an expected year-over-year plunge in net income that could even produce losses for the coal giant. Yet even if Peabody earnings go negative this quarter, its prospects remain brighter than those of more domestically focused rivals Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR). With Arch Coal and Alpha Natural lacking the same geographical diversification that Peabody enjoys, their losses could persist even when Peabody starts to grow again.

Peabody has suffered from the same trends as the rest of the coal industry, as low natural-gas prices have hurt domestic demand for thermal coal and weak global economic conditions have reduced purchases of metallurgical coal. Yet with operations throughout the U.S. and Australia as well as a non-controlling interest in a Venezuelan coal mine, Peabody's proximity to coal-hungry markets in Asia gives it an advantage over Alpha Natural, Arch Coal, and other U.S.-centered peers. Let's take an early look at what's been happening with Peabody Energy over the past quarter and what we're likely to see in its report.

Stats on Peabody Energy

Source: Yahoo! Finance.

Will Peabody earnings hold up this quarter?
In recent months, analysts have had mixed opinions on Peabody earnings. They've cut their loss estimates for the third quarter by more than half and now expect a profit for the full 2013 year, but they've cut their profit projections for 2014 by about 30%. The stock has been volatile but has generally reacted favorably, climbing 12% since mid-July.

Peabody has unquestionably suffered from persistently weak conditions in the coal industry. Cheap natural gas prompted many utilities to shift to the cleaner-burning fuel, and steel production cuts also led to lower demand for Peabody and other met-coal producers. In response, Peabody has joined Arch and Alpha Natural in reducing overall production, attempting to keep expenses low to get through the down-phase of what it hopes is merely a cyclical drop.

But Peabody could see better conditions in the U.S. bolster its long-term prospects. Natural-gas prices have risen substantially from last year's levels, and coal inventories at several utilities have fallen dramatically. Burning through inventory is sensible in the short run but isn't sustainable, and Peabody expected back in July that utilities would have to start buying coal again in the near future. That would lift Arch Coal and Alpha Natural as well, but Peabody should get at least its fair share of additional business.

Still, the biggest growth opportunity for Peabody remains Asia. Import demand in China and India is expected to grow 15% this year, creating big export opportunities for Peabody. Moreover, even though China has started to focus on the environmental impact of coal-fired electricity production, that move could actually could bode well for Peabody's Australian operations, which produce higher-quality coal than some competitors in Indonesia and elsewhere in the region. In addition, potential projects in Mongolia could give Peabody even closer proximity to China if it can successfully navigate what has been a difficult process so far.

In the Peabody earnings report, watch for further commentary on its deal to resolve disputes with bankrupt Patriot Coal and mining unions. A $310 million settlement is a tough pill to swallow in such tough times, but getting the episode behind it should help Peabody focus on its future growth plans even if it helps contribute to a loss this quarter.

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