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Peabody Energy's Decline Makes It a Buying Opportunity

July 09, 2014 | About:
rusticnomad

rusticnomad

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Peabody Energy (BTU) is having a bad time in 2014 with a decline of 17% in its stock price. However, the company had released impressive results recently. The quarterly results were satisfactory as the company emerged with strong results despite tough times prevailing in the current market place. The reason for the coal company’s outperformance was an increase in coal demand all over the world. Peabody is looking geared up for a better performance as it is seeing opportunities due to the growing demand for coal.

Improving prospects

The markets of India and China can be a growth driver for the company as these countries went for large imports in the last quarter. It indicates the growing demand for coal in these regions. This can be key to Peabody's outperformance in the future. On the other hand, price of natural gas is increasing in the U.S., so this is leading consumers to shift toward coal, giving Peabody's prospects a shot in the arm.

The Australian market is also a potential driver from where the company can see growth. With the lower Australian dollar, exports are expected to increase, giving Peabody a competitive advantage over its peers. Moving on, Peabody is expecting temporary demand weakness in the short run. But, the coal company is expecting a lift in coal demand as 2014 progresses.

Moving on to the seaborne thermal market, Peabody is seeing great opportunity in China and India. Chances are brighter in India than China, because Indian coal imports have tripled overtime, indicating that there is huge demand for coal in India. This is a bright opportunity for Peabody. On the other hand, demand for coal might increase in China, as the country has announced the build out of a 100 gigawatt plant for coal fuel generation by 2016, and more than 20 coal to gas plants by 2020.

Peabody might also see bright opportunities in Asian markets such as South Korea, Indonesia, and other Asian countries. Further, forecasts made by IEA reveal that demand for coal is growing in these countries, overtaking natural gas as the main fuel for power generation. Moving on to the U.S., Peabody is seeing strong indicators in the Powder River basin. Coal demand increased 5% in 2013 as utilities switched back to coal, and with natural gas generation declining, the company is seeing strong coal demand from this region.

Impressive strategies

Peabody is coming up with strategies to increase shareholders' wealth also. It has planned to complete this with six strategic moves. At first, Peabody is focused on delivering operational excellence, building on safety and productive gains. Further, it is aiming at driving gains from the North Goonyella longwall top coal caving system as they have begun operating at designated levels.

Secondly, the coal company is focusing on attaining cost effectiveness through cost improvements. Further, it is expecting 90% owner-operated Australian production after completing conversion of the Moorvale mine in Queensland.

Conclusion

Although Peabody is seeing weakness in some markets such as Europe, it is pushing out renewable and carbon growth. Further, in Japan, the government has announced more focus on economic growth, so it can lead to growth in coal demand. Lastly, in Australia, the government is working to repeal its carbon tax. With its six-step strategy, Peabody is looking to capitalize on the positive trends. As the situation in the coal market improves, Peabody can come out with better results in the future.


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