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This week, I’ve taken some time to pay attention to the energy industry. My focus has been primarily focused on the oil industry in particular, simply because that is perhaps the most impactful of any commodity that is traded on the financial markets. The ebb and flow of supply and demand in oil prices ripples through virtually every portion of the economy, which is why I think it’s important to make tracking this industry a regular part of any sound investing strategy.
Another segment of the energy industry that hasn’t been getting a lot of attention, at least from the investing public, however is coal. Both commodities are finite resources, and both face a constant struggle to bring their exploration, production and delivery methods in line with environmental considerations and worries. To a lot of people, coal is considered far less favorable than just about any other energy commodity, and it is an industry that many experts and analysts consider to be a dying industry. That means that coal companies are having to resort to more creative approaches to attract investors than traditional methods like growth forecasts.
I was intrigued this week when I saw a report indicating that from September 2017 to 2018, coal companies had returned about $3.7 billion to shareholders via dividends and stock buybacks. Peabody Energy Corp. (BTU), in particular allocated nearly two-thirds of their free cash flow in 2018 to share buybacks and dividend payout, and they have indicated they plan to return all of their free cash flow in 2019. I don’t think this is a smoke-screen, although the far-larger-than-normal levels stocks like BTU are paying out to dividends and buybacks certainly is a bid to bring more attention to an industry that has been struggling through a downward trend since the beginning of 2018. It’s also true, however that companies can’t make these kinds of plans if they don’t have the resources to follow through. Is BTU a stock you should pay more attention to? Let’s dive in and try to figure it out.
Fundamental and Value Profile
Peabody Energy Corporation is a coal company, which is engaged in the mining of thermal coal for sale primarily to electric utilities and metallurgical coal for sale to industrial customers. Its mining operations are located in the United States and Australia. Its segments are Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other. It also markets and brokers coal from other coal producers, both as principal and agent, and trades coal and freight-related contracts through trading and business offices in Australia, China, Germany, India, Indonesia, the United Kingdom and the United States. Its other energy-related commercial activities include participating in operations of a mine-mouth coal-fueled generating plant, managing its coal reserve and real estate holdings, evaluating Btu Conversion projects and supporting the development of clean coal technologies. BTU has a current market cap of about $3.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings dropped by a little over -42%, while Revenues declined by almost -8%. In the last quarter, earnings improved by about nearly 40%, while sales were mostly flat, but negative at -1.1%. The company operates with a healthy margin profile; Net Income was 11.6% of Revenues over the last twelve months and increased impressively to nearly 18% in the last quarter. That is a strongly positive indication that the company profitability is improving.
Free Cash Flow: BTU’s free cash flow is much stronger than I expected when I began my analysis of the stock; over the last twelve months it was $1.265 billion. This number translates to a remarkably high Free Cash Flow Yield of 38.7%.
Dividend: BTU pays an annual dividend of $.52 per share, which translates to an annual yield of 1.83% at the stock’s current price.
Return on Equity/Return on Assets: These numbers are healthy. ROE is 14.57 and ROA is 6.6.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BTU is $30.15 and translates to a Price/Book ratio of .94 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.3, suggesting the stock is nicely undervalued by more than 38%; at par with its average, the stock should be trading a little above $39 per share, which is attractive.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line shown on the chart above traces the stock’s downward trend from a peak at around $48 per share. The stock is currently sitting just a little off of its 52-week low around $28 per share, with near-term momentum moving mostly bearish right now. I expect the stock to see pretty significantly support in the $27 to $28 range, based on previous pivot activity over the last couple of years; however a break below $27 should see the stock retest all-time lows below $25. The stock would need to break above its pivot highs from the beginning of March at around $32 to begin building any kind of sustainable upward trend.
Near-term Keys: If you’re looking for a short-term bullish trading setup, you the best signal would come from a push above resistance at $32. That could be a nice reversal signal to buy the stock or start working with call options, with a price target at around $35.50 as shown by the 38.2% retracement line. A push below $27 could be a signal to short the stock or consider buying put options with a target at around $23 to $24. On a long-term basis, the stock has a strong fundamental base, with a very nice valuation. Between stock buybacks and dividend payouts, the company is aggressively returning value to its shareholders, which should give the stock pretty good support through the rest of this year, and could even help to give it a nice lift in price for those willing to be patient.