Peabody Energy Corporation Annual Stock Valuation – 2014 $BTU

220px-Peabody_Energy_Logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – September 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Peabody Energy (BTU) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Peabody Energy Corporation (Peabody) is a private-sector coal company. The Company owns interests in 28 active coal mining operations located in the United States and Australia. The Company has a majority interest in 27 of those coal operations and a 50% equity interests in the Middlemount Mine in Australia. The Company also owns a noncontrolling interest in a mining operation in Venezuela. In addition to the Company’s mining operations, the Company markets and broker coals from its operations and other coal producers, both as principal and agent, and trade coal and freight-related contracts through trading and business offices. The Company conducts business through four principal segments: Western United States. Mining, Midwestern U.S. Mining, Australian Mining and Trading and Brokerage. The Company’s fifth segment, Corporate and Other, includes mining and export/transportation joint ventures, activities associated with certain energy-related commercial matters, Btu Conversion.
BTU Chart

BTU data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Balance Sheet – 6/30/2014

Current Assets $1,877,800,000
Current Liabilities $1,504,700,000
Total Debt $5,973,200,000
Total Assets $13,692,200,000
Intangible Assets $0
Total Liabilities $9,731,400,000
Outstanding Shares 271,500,000

Earnings Per Share

2014 (estimate) -$1.41
2013 -$1.12
2012 -$1.80
2011 $3.76
2010 $2.86
2009 $1.64
2008 $3.63
2007 $1.56
2006 $2.23
2005 $1.58
2004 $0.70

Earnings Per Share – ModernGraham

2014 (estimate) -$0.44
2013 $0.39
2012 $1.44
2011 $2.93
2010 $2.47
2009 $2.23

Dividend History
BTU Dividend Chart

BTU Dividend data by YCharts

Conclusion:

Peabody Energy does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, the lack of earnings stability or growth over the last ten years, and the poor PEmg and PB ratios.  Likewise, the Enterprising Investor is concerned with the high level of debt relative to the current assets as well as the lack of earnings stability or growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From purely a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.47 in 2010 to an estimated loss of $0.44 in 2014.  This demonstrated drop in earnings, in combination with the fact the company is currently losing money, does not support a positive valuation and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Peabody Energy (BTU)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Peabody Energy (BTU) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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