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Commentary

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.

 

 

 


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