Wait for a Better Entry Point on Peabody

04/20/2011 3:47 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

I’d buy Peabody Energy (BTU) on the post-earnings drop—except that I think you’ll be able to get this even cheaper in coming days. Commodity stocks will likely pull back (once again) over fears that growth in China will slow, as that country ratchets up its fight against inflation.

On April 19, the company announced first-quarter 2011 earnings of 67 cents a share, 7 cents a share better than Wall Street projections. Revenue of $1.75 billion was up 15% from the first quarter of 2010, and slightly exceeded analyst projections of $1.74 billion.

All this was pretty good for a company that saw its big Australian coalmines underwater for part of the period. But production declines were more than offset by price increases. Revenue per ton in Australia jumped by 43%, with price increases for metallurgical coal—up 74%—outstripping increases for thermal coal.

The stock was down yesterday on that company-specific news, and on a drop in the sector on those China fears.

For the second quarter, Peabody guided earnings per share to a range of 85 cents to $1.10. That’s well below the Wall Street consensus of $1.37 a share. For all of 2011, Peabody told analysts to expect earnings of $3.50 to $4.50 a share versus the current $5.08 Wall Street consensus.

Coal production volumes will be down from projections because of carry-over from the Australian floods, a scheduled move of a mine long wall in Australia, and difficult geology just encountered at the company’s Twentymile Mine in Colorado.

But part of the April 19 struggle in Peabody shares was a reflection of sector-wide worries about demand. The source of those worries is China, where the People’s Bank is struggling to get inflation under control.

The potential for price controls on energy and the possibility that Beijing will finally the slow the economy tanked China’s coal stocks on the same day. For example, China Shenhua Energy, the listed unit of China’s biggest coal producer, fell 4.6% in Shanghai trading.

I’d hold off on Peabody until the worries about China’s growth hit an extreme. The stock’s January low of $58 seems a good first take on a buying target. I’m going to add it to my Jim’s Watch List today.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of Peabody Energy as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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