Peabody Energy's Popping: Here's the Real Reason Why

Source: Decumanus, via Wikimedia Commons

Peabody Energy Corp. (BTU), a company with coal mining operations in both America and Australia, has seen its shares pop by as much as 9% today. There are lots of reasons for this movement, but there's one that's not getting a whole lot of attention right now. Read below to see what that reason is, and what it might mean for your investments.

But first, the nuts and bolts of earnings
The two most followed variables when it comes to earnings are the revenue and earnings per share figures. Here's how Peabody Energy Corp. fared versus analyst expectations.

Sources: E*Trade, SEC filings

Obviously, with revenue coming in exactly where it was expected to, it was the surprising profit Peabody Energy Corp. was able to turn that had investors excited. CEO Gregory Boyce said, "Peabody's third quarter results were led by significant cost reductions across all regions and higher Australian volumes." In other words, the company cut spending more than expected, which led to more money left over for profit.

But there's another important nugget from the company's report. Though prices for coal—as aluminum and steel, which use metallurgical coal—were lower than last year, demand from the company's Australian operations was up 6%. That kind of diversity is especially important as Australia is located much closer to China and India, which is where demand for coal is rising.

Competitors Arch Coal Inc. (NYSE: ACI) and Alpha Natural Resources, Inc. (NYSE: ANR), on the other hand, don't have that kind of geographic diversity—with all operations located in North America. Not only has demand for coal in North America slowed down, but the Obama administration has made it clear that it doesn't view coal as a legitimate long-term solution for the country's energy future.

Though Arch and Alpha have experienced modest gains today on Peabody Energy's surprise pop, that distinction is important to remember when investing in coal stocks.

Another variable being overlooked
At the beginning of this week, I highlighted Peabody as a stock that would make a big move today. The reason was simple: 7% of Peabody's shares were being sold short (click here for an explanation of what that means). Though it's not an astronomical number, having 7% of the company's shares sold short is much higher than the market average.

When a stock is sold short, and big news comes out that's positive—like, say, a company reporting earnings that are a full $0.09 above the consensus—the stock is likely to pop as shorts cover their position. Lo and behold, that's what happened today.

It's worth noting that the market is well aware of the superior position Peabody is in: Arch Coal and Alpha Natural Resources have 16% and 20%, respectively, of their shares being sold short.

The important thing to remember here is that this kind of a pop has just as much to do with short-term considerations as it does long-term ones. Today's pop is in no way indicative of a major improvement in the long-term outlook. Coal is still out of favor in North America, and investors in Peabody need to remain focused on demand from China and India.

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