Peabody Embraces Coal Supercycle

By Greg Sushinsky | February 02, 2011 AAA

Coal producer Peabody Energy (NYSE:BTU) posted impressive fourth-quarter and full year earnings, nearly doubling its quarterly profits. Higher demand along with a rise in coal prices fueled the company's second best year in history. Peabody saw strong gains in the U.S. as well as global markets.

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Strong Coal Sales
Coal sales volume was 245.9 million tons for the year, a record, compared with 243.6 million tons last year, which was also a record. For the quarter, sales volume was 63.9 million tons, an increase from last year's quarter. Revenues for the full year were $6.86 billion versus $6 billion a year ago. For the quarter, revenue was $1.8 billion compared to $1.5 billion in the quarter a year ago. Notable was the 58% revenue increase in Australian coal operations. Rising prices fed a strong performance in both metallurgical and seaborne thermal coal.

Adjusted diluted earnings per share for the quarter rose to 85 cents from 43 cents a year ago. For the full year, adjusted diluted EPS was $3.05 compared to $1.92 the previous year. Adjusted income from continuing operations grew to $852 million for the year and $234 million for the quarter. The quarterly figure nearly doubled. Peabody's earnings numbers all say the same thing: it was a terrific quarter and a tremendous year.

More on the Australian Story
The main focus on coal news for the quarter was down under, as the Australian flooding created logistical nightmares and supply disruptions in the industry. Despite taking an $85 million hit on its earnings, Peabody still managed an 82% increase in gross margins in its Australian operations, as the company increased Australian output by 21%. With China eating up coal, Peabody's Australian performance showed the strength of its seaborne operations for providing Asia-Pacific coal. Next year, 70% of Peabody's growth and expansion capital will be for Australia.

Coal Continues to Heat Up
While the U.S. is still a fertile market for coal, the global arena is increasingly where it's at. Things continue to heat up for the coal producers. Arch Coal (NYSE:ACI), Peabody's U.S. rival, is seeking to boost sales of its coal in the Asia-Pacific region. Its deal with Canadian Crown Corp.'s Ridley Terminals should give Arch better access for shipping coal to Asia. Arch has also been mentioned as possibly being interested in bidding for Massey Energy (NYSE:MEE), which has widely been reported as a takeover candidate. Alpha Natural (NYSE:ANR) has been reported in advanced talks with Massey. Meanwhile, Patriot Coal (NYSE:PCX) is positioned well with its metallurgical coal exposure.

Into the Supercycle
Although there has been much talk and worry about the specter of rising raw material costs and commodity inflation, the powerful Asia-Pacific demand underlies the true future story of coal. Peabody's CEO Gregory Boyce spoke openly of this "long term supercycle for coal," which finds the continuing strong growth in India and China on top of what Boyce cited as "a much larger base," to yet grow from. This is coal's story, its most fundamental interpretation for long-term investors.

Although the stock market tends to focus on the micro-developments or even what it may consider a good but not great outlook for Peabody's first quarter, the supercycle of growth is why it's going to pay to be a bull on coal and Peabody. Some speak of the supercycle for coal in terms of 20 years or longer. Now that's long term investing. It gives investors plenty of chances to monitor Peabody and buy shares when the prices fall to more attractive levels. (These options represent one of the most important political commodities. Check out Fueling Futures In The Energy Market.)

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