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Tuesday January 05, 2010
Peabody Energy (BTU): Hannah Choe's top 2010 stock
The contributing analyst with Personal Finance explains, "Demand for coal, particularly from the Pacific Rim, China and India, is rebounding as the global economy recovers." "The company reported better-than-expected third quarter earnings, primarily because of a lower costs associated with US operations, increased volumes of metallurgical coal, and strong trading results. "Net income and revenue were down 71% and 12%, respectively, hurt mainly by lower US demand. But despite a difficult economic environment, Peabody expanded US margins and shipped record volumes of coal in the third quarter. 
"Although demand from Japan and South Korea hasn’t bounced back as strongly as it has in the early stages of prior recoveries, China has more than made up for this shortfall, emerging as a top coal importer. "In the first nine months of 2009, Chinese imports of thermal and coking coal rose 167% and 400%, respectively. And India will rely heavily on coal imports over the next five to six years to feed its rising domestic consumption of electricity. "Peabody CEO Greg Boyce anticipates that China will grow by 8% and India will grow by 6% in 2009, with even more impressive rates in 2010. "As a result, management projects markets for metallurgical and thermal coal to have a 7.5% compound annual growth rate in the next five-plus years as demand for steel and coal-fueled electricity rise. "As of mid-October, Peabody committed 3.3 million tons of coal for China deliveries in 2009, more than 1.7 million tons coming from its Australian operations. This demand from Asia should push Australia’s coal sales to 21 million to 23 million tons this year. "Peabody’s US sales declined, in part due to recession pressures; cooler weather and rising use of natural gas also crimped results. This combination of trends has led management to adjust 2010 product projects 15 million tons below 2008 levels. "Although US numbers are weak, third quarter sales from Peabody’s Australia operations climbed 30 percent from the second quarter, driven by surging demand in China and India. "The Australia unit projects sales of growth of 15% for 2010 over 2009 levels; Peabody actually plans to double exports from Australia over the next five years. "As part of its shift in focus to Asia, Peabody established a trading hub in Singapore and a new business center in Indonesia during the third quarter. Based on emerging Asia’s rapid turnaround, Peabody forecasts higher prices for thermal and coking coal in 2010. "Green energy is gaining popularity but coal remains king-half of the electricity generated in the US comes from it, and emerging markets want it, too. Global coal use is still expected to grow by 55% by 2025, and Peabody Energy is well positioned to profit." 
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