Peabody Energy (BTU) — my Top Pick for aggressive investors in 2020 — is one of the world’s largest coal mining companies, explains notes George Putnam, editor of The Turnaround Letter.
It operates 21 mines in the United States and Australia that produce thermal coal used by electric utilities and metallurgical coal (“met coal”) used by steel producer. About 65% of its production is low-sulfur thermal coal mined in the Powder River Basin in Wyoming. Its Australian mines account for another 18% of total output.
Peabody is among the most out-of-favor companies in the market. Investors have returned to momentum stocks, particularly those of companies in low-carbon, high-tech, secular growth industries.
With its carbon-intensive, "un-tech", secularly challenged product, taint from its recent emergence from bankruptcy, falling profits, loss of a valuable mine due to fire, and a tumbling stock price, Peabody offers almost nothing to most investors.
However, while the U.S. thermal coal market is in secular decline, coal will continue to provide an important source of fuel for electricity production. International thermal coal demand remains healthy, driven by growing Asia Pacific economies, even as investment in thermal coal production is declining.
International met coal markets remain in flux near-term, but the long-term demand outlook appears solid as steel is a core component of a growing global economy. We don’t believe a collapse in coal prices in either the U.S. or globally is likely. Any pricing strength would be an unexpected positive.
Peabody generates considerable cash flow, has a healthy balance sheet, and is managed with shareholders and debt reduction as top priorities.
Most importantly, BTU trades at only 3x estimated 2021 EBITDA, based on expectations for a continued slide in profits over the next two years. At this valuation, there is considerable upside potential if things just go “less wrong” than expected. For disclosure, employees of the publisher of The Turnaround Letter own shares of this stock.
(Editor's note: In 2019, George Putnam chose General Electric (GE) as his Top Pick. With the shares up 54%, the advisor says, "We continue to have a "buy" rating on GE. The upcoming completion of the BioPharma sale will greatly improve GE’s liquidity, while progress on other priorities should lead to higher earnings and lower risks.")
