Upside in Coal: Why Peabody Was Given 40% Upside in New Analyst Coverage

Commodities & Metals

Published: March 20, 2019 11:40 am

Last Updated: January 30, 2020 11:11 pm

Despite the political support for coal, the reality is that the industry continues to face many pressures ahead. Just don’t tell that to Credit Suisse, given its outlook on Peabody Energy Corp. (NYSE: BTU). The firm initiated coverage on the coal player with an Outperform rating, and its $42 price target implied upside of 40% from the $29.99 prior closing price.

Not all coal companies are created equal, nor are the target markets for coal. The new coverage from Credit Suisse noted that thermal coal is near its bottom and that the market is valuing Peabody like a peak met-coal play.

Woodworth believes the market has fundamentally mispriced the equity of Peabody. His view is that its shares have significantly de-rated after events at North Goonyella and have sold off in fairly tight correlation with the recent move lower in Newcastle thermal. His report said:

With seaborne thermal prices near bottom, spot coking coal moving back up, and Peabody likely to provide positive updates on the North Goonyella transition to 10 North, we believe risk/reward today is highly compelling.

The firm expects Peabody to repurchase about $500 million in stock during 2019, with a strong free cash flow profile of about $1 billion over the next two years. Peabody is also called out as having a shareholder-friendly management team. The report also noted:

Peabody has a strong growth profile in seaborne thermal with tier 1 assets as well as tier 1 thermal assets in the US. The mix upgrade in the metallurgical portfolio with Shoal Creek is highly accretive. The market seems to view Peabody as a highly cyclical, peak of cycle pure play coking coal equity trading at 4.0x 2019.

While met is highly cyclical, Woodworth believes that the market underestimates supply scarcity in China from water quality, safety and land conservation efforts. Peabody is viewed as a stable cash generator as over 50% of EBITDA comes from Tier 1 seaborne thermal and PRB, with only about 15% coming from coking coal for 2020.

In a different and less enthusiastic analyst call from Wednesday, Peabody was started as Market Perform and assigned a $34 price target at BMO Capital Markets in our full daily analyst coverage.

Peabody Energy shares were last seen trading down 1% at $29.69 on Wednesday morning, after a $29.99 prior close. Its 52-week range is $28.07 to $47.84, and the consensus analyst target from Refinitiv is $40.67.