Peabody Energy Corporation (BTU) in St. Louis, Miss., is one of the largest private-sector coal mining companies globally. It operates through five segments: Seaborne Thermal Mining; Seaborne Metallurgical Mining; Powder River Basin Mining; and Other U.S. Thermal Mining. Strong coal market demand and an improvement in pricing as economies recover from the pandemic have benefitted BTU significantly. So far this year, the stock has surged 482.2% in price, driven primarily by recent hype around the coal mining company on Reddit forum WallStreetBets.

However, BTU’s shares have tanked 21.3% over the past five days. Eighteen hedge funds in the database of Insider Monkey held stakes in the company at the end of the second quarter of 2021, down from 21 in the preceding quarter. Closing yesterday’s session at $14.03, the stock is trading 29.2% below its 52-week high of $19.83. 

Although surging natural gas prices and a rebound in electricity demand have been a boon for the coal industry, pandemic-related supply disruptions and capacity constraints could affect the industry’s growth.

Here’s what could influence BTU’s performance in the coming months:

Uncertain Outlook of the Coal Industry

According to EIA’s Short-Term Energy Outlook, coal production is expected to increase by 66 MMst to 601 million short tons in 2021 (MMst). This increase is expected to be driven primarily by high demand for coal from the electric power sector due to surging natural gas prices. However, capacity constraints at coal mines and limited transportation could make it difficult for the production levels to meet the substantial rise in demand. Furthermore, a slide in sector employment as more countries embrace lower-emission options could be concerning.

Given such an uncertain backdrop, we think BTU could face challenges in its growth path in the near term.

Mixed Growth Story

A $833.13 million consensus revenue estimate for the current quarter, ending September 30, 2021, represents a 24.2% increase year-over-year. Analysts expect BTU’s EPS to rise 168.1% year-over-year to $0.47 in the current quarter. However, its EPS is expected to remain negative in the current year.

BTU’s revenues and EBITDA have decreased at CAGRs of 21.7% and 41.3%, respectively, over the past three years. In addition, the company’s tangible book value declined at a 35.8% CAGR over this period. Also, its total assets have decreased at a 17% annualized rate over the past three years.

Mixed Financials

BTU’s revenue rose 15.4% year-over-year to $723.4 million in the second quarter, ended June 30, 2021. Its adjusted EBITDA grew 421.8% from the prior-year quarter to $122.1 million. Also, BTU’s revenue from its Seaborne Thermal Mining Operations rose 19.8% year-over-year to $194.1 million. But the company’s operating loss totaled $4.2 million, while its net loss came in at $25.3 million for the quarter. Moreover, its cash, cash equivalents, and restricted cash declined 33.8% year-over-year to $561.9 million for the six months ended June 30, 2021.

BTU’s 0.6% trailing-12-month asset turnover ratio is 62.8% higher than the 0.4% industry average. However, its 14.4% trailing-12-month gross profit margin is 65.2% lower than the 41.2% industry average. In addition, the company’s ROE, ROA, and ROTC are negative 31.7%, 6.9%, and 2%, respectively.

Consensus Price Target Indicates Marginal Upside

All five Wall Street analysts that provided ratings for the stock rated it Hold. The  $14.75 consensus price target  represents a 5.1% potential upside from yesterday’s $14.03 closing price. The price target ranges from a low of $11 to a high of $18.

POWR Ratings Reflect Uncertainty

BTU has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. BTU has a C grade for Quality. The stock’s mixed profitability is in sync with this grade.

In terms of Stability Grade, BTU has an F. This indicates the stock’s relatively high beta of 1.58.

However, the company has a Momentum grade of A, which is in sync with its price returns year-to-date.

In addition to the grades I’ve highlighted, one can check out additional BTU ratings for Growth, Value, and Sentiment here. BTU is ranked #6 of 10 stocks in the B-rated Coal industry.

Bottom Line

While BTU’s share price has surged significantly year-to-date as retail traders have pumped up the stock on social-media hype, its uncertain growth potential could make investors cautious about the stock. Furthermore, because the coal industry faces supply and production challenges amid a substantial rise in demand, the stock could suffer a price pullback in the coming months. So, we think investors should wait for the outlook to improve before investing in the stock.

How Does Peabody Energy (BTU) Stack Up Against its Peers?

While BTU has an overall C (Neutral) rating, one might want to consider looking at its peers Ramaco Resources, Inc. (METC) and Yanzhou Coal Mining Company Limited (YZCAY), which have overall ratings of B (Buy).

BTU shares rose $0.52 (+3.71%) in premarket trading Thursday. Year-to-date, BTU has gained 507.88%, versus a 18.82% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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