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Peabody Energy: Stellar Results, If Anyone Cares

by: Trader Mark July 23, 2008 | about stocks: BTU    
Trader Mark

Trader Mark

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First, wow what a day. I feel like I suddenly own a fleet of financials for the past year. Very strange past 2 months - in June while the market was demolished we held up fine, and now the exact opposite is happening in July. I guess reversion to the mean still holds.

I am checking the results over at CGM Focus [CGMFX] every day to see how Ken Heebner is handling this and he was down 5% yesterday alone and over 9% the past week; 14% for the month. This is the "risk" part of risk/reward of running concentrated portfolios. We're outperforming those results the past month, but that is not much consolation as we watch the past year's gains boil away. I'll have to double check our holdings for subprime exposure tonight (no wait, that would be a "good thing" to have the past few weeks) - in the meantime we are back to over $200K in cash as I check for missing limbs. Some of these "global growth" stocks are now priced below levels they traded when crude was below $100. Nuts. The group that really gets me are the infrastructure stocks - why they are being decimated along with everything else is really a mystery. Again it's all just "one big trade" it appears.

A couple of things before we get to the results of Peabody - (a) commodities are out of favor since the price of oil is all that matters... oil goes down = the commodity trade is broken, and sell them all and (b) I don't own coal for 2008 earnings so if they hit, or miss an earnings number, it is irrelevant (to me).

Peabody "only" beat analysts expectation by 32 cents... and they are down 5%+ for the day as I write this. I'd chuckle, but since our gains are evaporating so fast it is hard to do so. But this is showing us that caution is in store and even great results right now, don't matter. One day they will matter again, but this is not that period. With fertilizer reporting tomorrow, if we do not get good "reactions" to what will be stellar results it's really going to be a downer - I cut a bit of that sector back today just for pain threshold reasons. Also I can see the bears pointing to "input costs" rising (which has been an issue the past year, and will be an ongoing issue from here to infinity) - i.e. natural gas for one... even though natural gas has fallen off the face of Earth in the past 3 weeks (and hence should no longer be an issue, eh?). But logic has no place to call home right now. Buy homebuilders...

With that said, on to Peabody Energy's (BTU) results. (which again, don't matter right now since the market is too busy buying banks which just announced $4 billion of losses because for the upteemth time since last summer, "that" was the "kitchen sink quarter") I know, I know the market is a forward looking indicator and it's "signaling" the imminent recovery in 6 months - the same one it signaled in September/October 2007 (at all time highs) and in April/May 2008. Those 2 "signals" didn't work out too well. I'm sure this will be the real one. Ahem.

  • Coal miner Peabody Energy Corp. said Wednesday its second-quarter profit more than doubled, beating Wall Street's expectations as the miner benefited from higher shipments, soaring global prices and tighter coal supplies worldwide.
  • The St. Louis-based company, one of the world's biggest coal producers, reported net income of $233.4 million, or 86 cents per share, compared with $107.7 million, or 40 cents per share, in the April-through-June period a year ago.
  • Analysts polled by Thomson Financial expected, on average, earnings per share of 54 cents and revenue of $1.5 billion.
  • Revenue rose 43 percent to $1.53 billion from $1.07 billion in last year's second quarter.
  • Peabody, whose coal fuels roughly one-tenth of all U.S. electricity generation and more than 2 percent of worldwide electricity, tweaked the lower end of its full-year earnings guidance, saying it expects income from continuing operations between $2.50 and $3 per share. The company said in April it expected per-share profits of $2.20 to $3 for 2008.
  • "We believe that the strength in the global coal markets is very long-term in nature, and we expect this will result in very attractive coal prices for many years," Richard Navarre, Peabody's president and chief commercial officer, told analysts (granted he is biased).
  • Such bullishness was rooted in Peabody's belief that global demand for coal used in making steel and generating electricity will continue to outpace supply, while inventories in key countries -- chiefly China -- remain critically low. Coal, the company said, is expected to outrun all other energy forms over the next two decades.
  • Peabody said worldwide steel demand has grown at a 6 percent yearly clip, stoking the need for greater amounts of the kind of coal used in metal-making. New electrical generation requiring coal to produce the steam that drives turbines is being developed in scores of nations around the world, the company said.
  • All told, Peabody's top executive told analysts Wednesday, "major coal exporters are straining to keep up against this sustained demand growth."
  • "All aspects of the coal chain are under pressure, and more nations than ever are seeing the valuable resource that their coal represents," said Gregory Boyce, Peabody's chairman and chief executive. "We believe global supply and demand is even tighter than many think," given stockpile shortfalls in China, India, Indonesia and South Africa.
  • The company, which Boyce said generates more than half of its earnings from outside the U.S. compared to just 1 percent five years ago, sold 59.8 million tons of coal during the quarter, compared with 57 million tons during the same period last year.
  • Peabody said Monday it has completed a $50 million expansion of an Australian mining complex that exports coal to Asia. The New South Wales operation's expansion included development of a mine expected to produce more than 2.5 million tons per year. The complex's primary mine produced more than 4 million tons last year.
  • Australia produces 60 percent of the world's seaborne coal used in steel-making, Peabody said.
  • The miner said China has idled more than 60 coal plants because coal inventories have shrunk to less than three days supply. China also has trimmed its coal exports by more than 8 percent this year and announced plans to lower or eliminate its coal import tariffs, Peabody said.
  • Peabody also said India will need 78,000 megawatts of new coal-fueled generation by 2012, meaning an additional 265 million tons of coal use in that country.

So once again - no change in long term thesis; but we're simply getting hammered in the past week and a half on the stock prices since as we all know commodities are all the same, and since crude has fallen from "all time highs" all the way down to "near historic highs", everything must be cut to shreds in the commodities complex. Until "fast money" wants back into this space, we can expect more of the same, no matter what the fundamentals. That could be tomorrow, 2 weeks from now, or in 2 months. Depends on when the algorithms of the

quant

hedge funds say it's time. That's just the new era of the stock market where quarterly performance is everything.

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This article has 10 comments:

  •  
    Jul 23 05:32 PM
    That is the truth, earnings up, price down, because the fast money is going for financials, and spurning energy. Companies that will be expanding and earning to the max have had their stock price go down, because crude is down. The herd. Give me a break!
    Reply
  •  
    Jul 23 09:43 PM
    I agree -- it may take a while but Peabody back in the 80's anf up will arrive when people come to their senses. I'd love to see a dividend increase to move it along a little quicker.
    Reply
  •  
    Jul 24 09:10 AM
    I am a longterm holder of coal company stocks. However, my favorite is ARLP. Their earnings are to be reported Monday. It will be interesting to see if their story is as good as Peabody's. It should be. US coal spot prices have essentially doubled over the last year.
    Reply
  •  
    Jul 24 09:56 AM
    Guess the good old days..or maybe there weren't any? when fundamentals were used by us peons to buy stocks...are gone.
    It's getting worse than shooting craps in Las Vegas....
    Reply
  •  
    Jul 24 11:53 AM
    Right--just look at today --- shooting craps again when things should be on a continual rise like the open. Not to be. Added some more ACI.
    Reply
  •  
    Jul 24 12:56 PM
    Hold till End of August for the seasonal rally and of course the pending end of the Bejing Olympics.... They will need to fire up their factories again.

    Thx jegan ;-)
    Reply
  •  
    Jul 24 02:26 PM
    You continue to knock the cover off the ball with this fine piece. ICO the ¨¨black sheep¨¨ of the coal stocks just did a great earnings report. They have turned it around because of the demand. All dogs have their day. Soon amigo Soon we will have ours! Keep it up Mark.
    Reply
  •  
    Jul 24 09:30 PM
    I take it you don't employ any sort of hedging strategy? (i.e. "absolute return"). I'd guess I have to go along with those that say the "hot money" has/is cycling from oil to long financials...(probably not "smart" to short 'em these days, unless one wants an inquiry from the SEC. *G*).
    Reply
  •  
    Jul 29 02:08 PM
    i think the writer of this piece understates the demand. on the other hand i am skeptical about all the prb coal btu has.
    Reply
  •  
    Aug 01 05:00 PM
    How long do you think before the discussion on windfall profit taxes shifts from oil to coal on Capitol Hill--given their growing profitability?

    industry.bnet.com/ener.../
    Reply
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