This is normally the point in an economic cycle where people start cutting back on their variable personal expenses. Many are cutting back on the visits to Starbucks, Coach or Whole Foods, but is anybody out there cutting down significantly on their electricity usage?

It's not as though we're going to switch over to candles, whale oil lamps or bicycle-powered LCD TV's. That, too, in a nutshell is why I'm relatively positive on Peabody Energy (NYSE:BTU) these days. Demand for copper, iron, zinc and the like can drop to a breath-taking degree in the midst of a recession, but electricity demand (the principle use for Peabody's coal) generally holds up much better. (To learn more about this economic cycle effects businesses, read The Impact Of Recession On Businesses.)

Dig. Sell. Repeat.
Results for the company's third quarter were solid. Reported revenue rose nearly 28%, as the company both sold more tons of coal and garnered more money from each ton they sold. Along the same lines, the company kept operating expenses under control, and more than half of the incremental revenue (relative to last year) made it to the operating profit line.

The Future of Coal
Looking ahead, I see a pretty positive picture for Peabody. The company is securing good prices for both Powder River Basin coal (an increasingly popular type of coal for power generation) and Illinois Basin coal, and relatively little coal is left unpriced for 2009, while a little more than one quarter's worth of production is still unpriced for 2010.

On the demand side, the U.S. continues to export more coal and so while economic activity is likely to slow in the domestic market, countries like China and India are apt to continue to demand increasing amounts of coal (good news for Peabody's Australia operations).

What's more, I wouldn't be surprised to see the credit crunch help major operators like Peabody, Arch Coal (NYSE:ACI) or CONSOL Energy (NYSE:CNX). Capital is increasingly scarce these days, and it takes capital to buy reserves, open mines, and buy equipment from the likes of Joy Global (Nasdaq:JOYG), Bucyrus (Nasdaq:BUCY) and Caterpillar (NYSE:CAT). That could keep smaller companies from executing on expansion plans, and perhaps even drive some of them to the M&A bargaining table. Peabody still has some balance sheet flexibility and I, for one, wouldn't mind seeing the company use it in an opportunistic fashion. (To learn more about these deals, read Mergers and Acquisitions Tutorial.)

The Long Term Story Still Includes Coal
Say what you will about the problems with coal-fired energy production, but it isn't going to go away. Coal is a (relatively) cheap source of energy and it's going to be a long, long time before SunTech (NYSE:STP), JA Solar (Nasdaq:JASO) or any other alternative energy player can move the needle appreciably on the worldwide need for coal-fired generation. Better still, even as more people are (hopefully) able to use solar or wind power for home power needs, there are companies like Headwaters (NYSE:HW) working on ways to make coal a cleaner fuel and one that could perhaps be used as an alternative automobile fuel.

There are several ways to play the coal story - from the lower-leverage Arch Coal to the high-yielding Penn Virginia Resource Partners LP (NYSE:PVR) to the Market Vectors Coal ETF (NYSE:KOL) - but Peabody offers investors a well-run global giant trading at a pretty appealing valuation today.

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Tickers in this Article: BTU, ACI, CNX, JOYG, BUCY, CAT, STP, JASO, HW

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