Peabody Energy Corporation (BTU) is poised to improve earnings next year as the outlook for metallurgical coal rebounds from the current lows, driven in large part by Chinese demand for this coal producer’s Australian reserves, says David Beard, Analyst at IBERIA Capital Partners.
“Peabody is the go-to name. Given that we feel we are at or even past the bottom, we want to go with the leader in the group, and that’s Peabody. The stock is not much above book value, just tends to be a floor the stock of just under $18 per share. The leverage in EBITDA and EPS relative to coking coal is quite substantial. We feel 2014 earnings should improve dramatically, pushing the stock towards our $35 per share price target,” Beard said.
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Beard says China has become a net importer of metallurgical coal for its continuing production of steel, given their growing metal needs and depleting coal reserves. BTU, with its mines located in Australia, has a geographical advantage over peers when delivering coal to its neighbor in the Pacific.
“China has gone from an exporter of coking coal as recently as 2007 to an importer of around 50 million tons today. They also consume a huge amount of coking coal from internally mined production, so I think longer term, people are looking at a couple of different things: Will China import more as their internal production drops even if they don’t produce that much more steel? Their mines are depleting, and thus they need to import more coking coal,” Beard said.
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