Peabody Energy – Cheap By Any Measure
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes the market overreacts to news and it gives you another chance to pick up a high-quality company at a low price. That appears to be the case with Peabody Energy (NYSE: BTU).
The bad news is Peabody missed its last earnings target by about 24%. Since reporting earnings the shares, which had briefly climbed back up to near $40 a share, trade today at $34.21. So an earnings miss and a decline of 14.5% ... how can I say this company is cheap by any measure? Let's look at the numbers behind the headlines and see what we find.
Current Price: $34.21
P/E based on '12 earnings: 10.00
Growth expected: 22.49%
Clearly the market is having trouble believing analyst predictions that Peabody will grow at over 22%. Is the market right or mis-priced?
Looking at past growth Peabody has been growing earnings by nearly 18% in the last five years. While past results don't always tell us what the future holds, the company does have the ability to grow. Prior to the most recent earnings miss, Peabody had beaten earnings estimates by an average of 6.6% in the three prior quarters. Analysts were calling for Peabody to make $5.09 for full year 2012 just 30 days ago. Today the average analyst estimate is only $3.42. So an earnings miss and now the company is going to earn 33% less than it was a month ago?
I'm sorry, but as analysts were wrong prior to this quarter I have a hard time believing these new numbers. This argues further that Peabody could leap over this lowered bar and get back to their estimate-beating ways.
There are two other reassuring factors that make me a believer in Peabody at these prices. Peabody has positive average cash flow (after paying capital expenditures and dividends) of $102 million each of the last four quarters. Management is being responsible with this extra cash, paying down long-term debt, and raising their cash position. With a stronger balance sheet, Peabody has the ability to continue to raise their dividend and increase earnings.
I've seen arguments for another coal company Arch Coal (NYSE: ACI). So just for comparison let's see how Arch stacks up against Peabody in some of the numbers we've looked at.
Current Price: $14.18
P/E based on '12 earnings: 7.20
Growth expected: 32.96%
On the surface Arch looks like a much better play. It's cheaper, has higher expected growth, and a higher yield. There are just a few differences that favor Peabody. Where Arch is expected to grow at 32.96%, their past earnings show they have been contracting by about 15% in the last few years.
While a turnaround is possible it's easier to believe Peabody going from 18% to 22% growth. Where Peabody had beaten earnings previously, Arch has missed estimates by at least 20% in three of the last four quarters. Where cash flow is concerned, Arch does show positive average cash flow of $82.3 million (after capital expenditures and dividends) the last four quarters. The problem is where Peabody has been paying down debt and building up cash, Arch is going the other direction. In fact, Arch has kept their cash about the same, and their long-term debt has more than doubled in the last year.
As you can see, just because a company looks better on the surface doesn't mean it necessarily is. It seems the market is underestimating Peabody. If they are able to meet revised estimates this could be a $75 stock. Given Peabody's history of beating earnings in the past, and the consistency of earnings growth, the stock looks cheap by any measure. Take a look at Peabody for yourself, and decide if this piece of coal is maybe a diamond in the rough.
The Motley Fool has no positions in the stocks mentioned above. MHenage owns shares of Peabody Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.