Coal isn’t the energy of the future, but it continues to play a huge role in the world today, both in terms of power and steel production, explains Mike Cintolo, editor of Cabot Top Ten Trader.
Coal plants produce 37% of the world’s electricity, including 30% in the U.S. and prices for metallurgical coal remain elevated thanks to strong demand (and, in the U.S., tariffs).
Peabody Energy (BTU) remains of the pure plays of both thermal and metallurgical coal, with ample reserves and, following a major restructuring during the past couple of years, a much more efficient operation—costs are low and the firm has morphed into something of a cash cow.
That fact, combined with the bullish industry fundamentals, is the main reasons the stock is strong today. Q1 results were solid (revenues were up 10% and EBITDA rose 7%, but free cash flow more than doubled), and with no meaningful debt maturities until 2022 and modest CapEx expectations, the firm is buying back shares like mad.
During the past year, Peabody has bought back 8% of its outstanding shares ($400 million worth), and just boosted its buyback program by another $500 million! It also pays a small dividend (1.0% annually).
There was also news that the Trump Administration might force grid operators to buy electricity from struggling coal plants. Peabody isn’t a great growth outfit any more, but the potential for monstrous amounts of free cash flow is real.
Technically, BTU emerged from a restructuring in April of last year, and after dipping for a couple of months, put on a nice show—shares rallied from their lows at 23 all the way to 42 in February of this year.
Then the stock began a normal basing period, and it was a beauty, with a well-formed cup, a modest low-volume handle and a strong breakout above $42 on May 30 that ran to $48 before BTU rested. Any dip of a point or two would be tempting, with a stop in the low $40s.
