GALP Digs Coal

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In the quest for growth at low prices, sometimes we have to dig just a little deeper.  With the world economy muddling along at constrained growth rates we might be fooled into thinking that energy from coal just isn't where we want to plunk some dollars.  With about half of the world's population lacking adequate power, coal has a large role in filling the holes in electricity generation.

I think that is probably wrong to be negative on coal long-term, as governments around the world are doing everything they can, including printing money, to get things chugging along. So while the global balance sheet still needs some fixing, it is probably reasonable to assume that despite Solar's Still Bright Future or the power of Going Nuclear, coal will continue to play an important role in powering your lights and your portfolio.

Among companies in the coal mine that immediately come to the fore is Peabody Energy (NYSE: BTU) which is the world's largest producer of coal.  Revenues for Peabody rose about 17% in 2011 despite the economic slowdown.  Analysts expect high single digit revenue growth in 2012 with some potential for slight variation up or down depending on global economic conditions. 

As of 2010, 84% of all Peabody revenues were from selling U.S. electricity producers coal, with 91% of that under long term contracts.  That business still forms a solid base for the company.  However, growth in America appears to be mooted as domestic energy demand is flat, utility scale and commercial scale solar reaches grid parity, new nuclear power plants are being built for the first time in decades and a strong willed EPA enforces environmental rules. 

Here is something that is more exciting about Peabody, they have recently refocused their growth prospects on Asia, particularly China, and expect double digit growth rates there for up to the next twenty years.  Peabody last year acquired Macarthur Coal of Australia in order to ramp up its production in the region.  With operations in Mongolia, Indonesia and Australia, Peabody is postitioned to take advantage of Asia's still impressive growth rates and thirst for energy.

Peabody stock currently trades at a Price to Earnings ratio of about 9, has a forward P/E of about 7 and has a low P/E/Growth of under 1.  The stock price per share is under $30 and is near its financial crisis crash price.  With a yield of just over 1% taking up only about 10% of free cash flow, Peabody could become a significant dividend payer in coming years if it chooses to match the payout ratio of smaller competitor Arch Coal (NYSE: ACI) which is near 50%.

Peabody meets both the test for growth and a stock price currently trading with some value.  GALP recommends buying before the next rally.  The Growth At Low Prices investment letter currently holds Peabody Energy in its model portfolio.

Kirk Spano and clients of his Wisconsin Registered Investment Advisor Bluemound Asset Management do not own positions in any company mentioned in this article.  Neither Kirk nor Bluemound clients have made any transactions in the previous 3 days or plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting or see his watch lists at www.GalpInvesting.com.


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