Peabody to Profit from Increase in Global Coal Demand
Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's hard to turn on the news today without hearing about the future of coal, and therefore the potential demise of coal companies such as Peabody Energy Corp. (NYSE:BTU) . If Obama was re-elected in 2012 it surely meant the death of big coal. But wait, there's more! We forgot to consider the global perspective and what coal means for the rest of the world.
Regardless of what you may believe, carbon dioxide emissions are being blamed for global warming and utilities have to address their (and our) carbon footprint. Coal has been portrayed as the evil, dirty power source responsible for millions of tons of carbon dioxide emissions annually and stocks for coal miners, like Peabody have plummeted. A two year history of this great company shows a steady slide from the high 70's in May 2011 to its low point of the low 20's in August, 2012. I say low point, because of the rebound that has already begun to happen.
Peabody Energy is set for a boom market as more power hungry countries use it for base power loads. There is no other fuel source that has the power density to provide us with the power we need at a reasonable cost. If we shutdown coal fired power plants, what do you replace them with? There is not enough alternative energy available to even keep up with incremental demand in power consumption. Coal will remain the fuel of choice for base load power plants in the US and globally. Alternative energy will have it's place and can help, but we will need coal for a very long time to come. Thusly, Peabody provides the edcuated fool an opportunity for some nice returns.
Peabody Energy is focusing on developing its coal resources in the western states where the coal is cheaper to mine. They are also well positioned with global exports which is where a lot of the energy demand is coming from. The rest of the world is building power plants to utilize the cheapest fuel source available and thus far, that is coal. The US is now exporting coal to developing countries. In fact, India has signed agreements to start buying coal from Kentucky coal mines. Worldwide coal consumption is predicted to grow by 2.6% per year for the next 5 years. That's a lot of coal!
Furthermore, coal is now being used in much more efficient, and dare I say, cleaner ways. The controversial plant built by Duke Energy in Edwardsport, IN is due to come on line in 2013. This new technology plant actually gasifies the coal instead of directly combusting it. The syngas produced during the gasification process is then used to power gas turbines. Alternatively, the syngas can be used for a feeder gas for chemical products. This revolutionary plant has paved the way for others to follow. Coal is now becoming more than just a fuel source for dirty power plants; it's a feed stock for other chemical plants. China is already utilizing gasification of coal for both power and chemical production.
In my opinion, companies like Peabody have been beaten down enough and will soon see a huge surge in their profits and stock price. BTU is currently trading at around 26 which is well below it's 52 week high of 39. As a bonus, it pays a dividend of 1.2% beating anything you can get at a bank. BTU has an up side of 20% just to reach it's one year target of 32. Arch Coal (NYSE: ACI) is a competitor, but does not seem to have the stability and resources that Peabody has. Peabody is operating with much nicer margins and postive cash flow. Peabody is much larger than Arch Coal (about twice the annual revenues). Alpha Natural Resources (NYSE: ANR) is another competitor for Peabody that is worth noting. Alpha does not have the reach that Peabody has in mining, but is branching out to provide other services to the mining industry. I'm looking for a stock that is already profitable (i.e. has positive cash flow and a positive number in the Earnings Per Share column). Peabody fits that bill and will allow the wiser investor to capitalize on the global coal demand.
Although I'm a big believer in alternative energy, I would recommend owning shares of BTU as I see this to be a commodity that is not going to go away any time in the foresable future.
Greg currently owns shares of BTU.