Valuation: Peabody Energy
Company Profile: Peabody Energy (BTU) (obtained via Thomson One Banker)
Peabody Energy Corporation. The Group’s principal activity is mining of coal. The Group operates through four segments: Western U.S. Mining, Eastern U.S. Mining, Australian Mining and Trading and Brokerage. The primary business of the first three segments is the mining, preparation and sale of steam coal, sold primarily to electric utilities and metallurgical coal, sold to steel and coke producers. The principal business of the Trading and Brokerage segment is the marketing, brokerage and trading of coal. The Group’s other energy related businesses include the development of mine-mouth coal-fueled generating plants, the management of its vast coal reserves and real estate holdings, coalbed methane production and transportation services. The Group owns and operates mines in the Arizona, Colorado, New Mexico, Wyoming Illinois, Indiana, Kentucky, West Virginia Queensland and Australia
Business and management review:
Is the business simple and understandable?
The core of the business is to mine coal and sell it; simple enough for me. The brokerage of the coal may get a little complicated as it is not a direct customer/supplier relationship.
Does the business have a consistent operating history?
Though the business has posted positive net income consistently; it’s the amount of that income that concerns this analyst. It was not until the last fiscal year end that the net income was over 10% of total sales. On the contrary they have been posting higher net income as a percent of sales consistently over the past ten years and it may be a sign that they are really beginning to become experts in their business.
Does the business have favorable long-term prospects?
Not if Al Gore has anything to say about it. I would say that the biggest concern for a company that relies on the world not going green to conserve energy, does not exactly have long-term potential written all over it.
Is management rational?
They seem to be focused on cutting expenses to drive profit margins so one could say that.
Is management candid with its shareholders?
I have to say I was kind of impressed with the extensiveness of their investor website: http://www.peabodyenergy.com/Investors/default.asp
Do they resist the institutional imperative?
I would say that it looks as if they have made strides to improve financial standing in the eyes of the market. So it seems as if they do. However; using coal and only coal because coal works, and not trying to find other ways of maintaining your business makes me think that they have not completely resisted it.
Financial and Value review
Defensive:
Size of firm:
Market cap is $13.5 billion FAIL
Strong financials:
Current ratio: .93 less than half of the 2.0 threshold FAIL
Earnings stability:
Positive Net Income for the past 10 years PASS
Dividend payment:
Has not consistently paid for 10 years FAIL
Earnings growth:
Moderate P/E ratio:
37.17 way over the threshold of 20 FAIL
Moderate Price to Assets:
P/B ratio is greater than 20. FAIL
Failing 5 of 7 tests; this fails to be an appealing stock for a defensive investor.
Overall: According to our style of investing here at moderngraham, we feel as though the risk involved with ownership of BTU is far too high for our taste.
Enterprising:
Somewhat strong financial standing:
Current ratio is still less than 1.5 FAIL
Debt to NCA is less than 1.1 PASS
Earnings stability:
Positive Net Income for 5 years PASS
Dividend stability:
Yes they currently pay a dividend PASS
Earnings growth:
Earnings are about 6X what they were 5 years ago PASS
Price:
Is absolutely more than 150% of net tangible assets FAIL
Overall
Passing 3.5 of 5 tests this would definitely be considered a risky stock even for the enterprising investor.
Valuation:
$34
Opinion:
With the current price being about $20 over our valuation; we feel that this stock offers far more risk than reward can be justified.
Disclaimer:
None of the staff of ModernGraham held a position in Peabody (BTU) at the time of publication. Please take a moment and review our methods and disclaimer.
