Peabody Energy Corporation (NYSE:BTU) is scheduled to announce second quarter results on July 22nd during market hours. The company is expected to report a loss of $0.28 against a gain of $0.33 during the same period last year. Revenue is expected to come in 5.2% lower at $1.64 billion.

There is good reason to believe that expectations are too low and that shares might move higher on the report. The estimate was revised downward from expectations for a loss of $0.15 two months ago and industry fundamentals look to be firming. High short interest could support the price as shares are bought back to cover positions ahead of the report or could lead to a short squeeze on better-than-expected earnings.

Electric utilities are back in the game
The Energy Information Administration (EIA) forecasts an increase of 26% in coal imports this year as utilities rush to restock reserves. Exports are forecast to decrease by 16% to 98.7 million short tons as demand increases for restocking. Last winter was one of the coldest on record across much of the United States, and utilities reduced coal inventories by 30 million tons in the first quarter. Reserves of coal are down to 20 days for many utilities and the Energy Department reports that days of coal supply fell below 60 days for the first time since 2011.

Inventories are so low that they have fallen out of the seven-year range reported by the EIA. It would take a build of approximately 30 million short tons to move inventories back to the mid-point of the range.

The EIA expects U.S. coal production to increase 2.7% (26.2 million short tons) this year but to fall 0.9% next year. The Appalachian region continues to see the most volatility in production due to its higher cost of extraction. A forecasted increase of 15.1 million short tons from the Appalachian region accounts for 56% of the total increase while the region accounts for 88% of the forecasted decrease next year. Even against the forecasted increase in production this year, inventories at utilities are expected to end the year at 124.3 million short tons, 16% lower than in 2013.

Coal prices are expected to increase for the first time in two years to $2.39 per MMBtu from $2.35 per MMBtu last year. Monthly average coal prices have jumped by 4.3% since January for $2.40 per MMBtu in April. Buying by utilities to restock their inventories could help the company beat expectations for sales this quarter, and I expect management to highlight the improved outlook in its conference call.

A low-cost provider with emerging market exposure
Peabody operates mainly in the Powder River Basin (PRB) and Illinois Basin (ILB) producing regions in the United States, both of which produce coal at costs competitive with natural gas at prices of $3.25 per million Btu or higher. This contrasts with competitors like Alpha Natural Resources (OTC:ANRZQ) and Arch Coal (OTC:ACIIQ), which still have considerable assets in the more expensive Appalachian region. The company operates in Australia as well as the United States, so continued weakness in metallurgical coal prices will probably limit gains though we have seen some decrease in global met coal production supporting prices so far this year. Peabody books 30% of its operating profit from non-U.S. markets and has been positioning for emerging market growth through acquisitions over the last several years.

Short interest has come down over the last couple of weeks but is still relatively high at 28 million shares borrowed. That represents 10.4% of the float with institutional investors holding nearly 80% of shares available in the market. Besides the possibility of an increase on the day of the earnings release, I believe there is a good chance that shorts may look to cover their positions early and support the price.

Peabody has run into trouble with its recent sale of Queensland assets to Bentley Resources. The company reported earlier this month that Bentley missed a June payment for the Wilkie Creek mine, a deal announced in May for $70 million. Peabody has said it continues to work with the company for completion of the milestone payments, and I don't think it will materially affect the quarter's results.

Shares of Peabody Energy are trading at 1.1 times book value, just below the industry average of 1.2 times book but less than half the 2.3 times average multiple over the last five years. Even if second quarter results fail to impress the Street, shares are relatively cheap and strengthening industry fundamentals should drive returns over the next year.