Coal is arguably one of the most widely used, and most controversial, energy sources in the world. Despite a growing push toward renewable energy sources, coal continues to hold its position as the third-largest contributor to U.S. electricity generation.
The largest coal company in the U.S. is Peabody Energy Corp (BTU), valued at $2.95 billion. Peabody produces both thermal coal for power generation and metallurgical coal for steelmaking, operating mines in the U.S. and Australia. Peabody has been through the wringer in the past few years, with the shares ultimately hitting lows south of $1 back in November 2021, pressured by concerns over a potential second bankruptcy filing alongside lower demand for coal.
More recently, Peabody got a big vote of confidence from one of its major shareholders, Barclays PLC (BCS). The British banking giant disclosed in its latest 13F filing that it increased its stake in Peabody by 183% in the second quarter to 389,798 shares.
Barclays’ big bet on Peabody is notable, as institutional investors were net sellers of the stock during the second quarter for the first time in years. Goldman Sachs (GS), Morgan Stanley (MS), Deutsche Bank (DB), and Susquehanna were among the institutions unloading BTU shares during the quarter, per the most recent round of regulatory filings.
Peabody is 80% held by institutions, and its stock price has been on a downward trend since reaching a 52-week high of $32.89 in November 2022. On a year-to-date basis, the coal stock is down more than 16% to underperform the S&P 500 Index ($SPX) by a wide margin.
So, what might be next for BTU now? Let's take a look.
BTU's Surprising Surge
BTU had a promising start in the early months of 2023, thanks to stronger coal prices and increased demand relative to the prior year. And on July 15, BTU surprised analysts by reporting stellar Q2 earnings that surpassed expectations on multiple fronts.
Revenue of $1.36 billion was a whopping 29% higher than the previous year, and sailed above the consensus estimate of $1.28 billion. Earnings per share of $1.16 were equally impressive, representing a 35% increase from the year before and outshining the anticipated $0.74. However, it's worth noting that earnings were down from the previous year's figure of $1.78 per share.
BTU’s comeback from its sub-$1 lows can be attributed to more favorable market conditions, as well as its own operational strategies.
Management has taken bold steps, like expanding their top-notch thermal mine in Australia, launching a substantial $1 billion stock buyback plan, and diversifying their product lineup across four key segments. The company's strategic growth has bolstered its competitive edge, profitability, and shareholder value within the coal industry.
Peabody's Earnings Projections
Analysts are once again expecting a year-over-year decline in the current quarter's earnings, but sequential growth, at least, is expected to return in the fourth quarter. The average earnings estimate for the December quarter is $1,00 per share, which is higher than the current quarter estimate of $0.74 per share.
Longer term, the earnings outlook is considerably more downbeat. After an expected 48% decline in fiscal year 2023, Peabody's bottom line is expected to shrink by nearly another 50% in 2024 to $2.33 per share.
While earnings projections are uninspiring, most analysts remain optimistic on BTU. The average target price for Peabody stands at $27.25, implying potential upside of about 24.7% from current levels.
That said, these predictions are the result of insights from only four analysts who've weighed in. Among them, three are enthusiastically rating BTU a strong buy, while one advises a more cautious hold.
What to Make of Barclays' Bet on BTU
Barclays is certainly taking a contrarian stance with its second-quarter pickup of Peabody shares, based on how most other institutions are positioning right now. And there may well be room for BTU to run higher from current levels, especially given Wall Street's relatively low earnings expectations for the coal giant.
However, the longer-term expectation for persistently negative earnings growth should be a red flag for those investors without a Barclays-sized portfolio to manage. Though the bank may have bulked up its BTU holdings by more than double in the second quarter, the stock still accounts for only 0.1% of Barclays' total U.S. equity holdings. With plenty of opportunities for upside elsewhere in the energy sector, investors may likewise prefer to keep their exposure to Peabody at a minimum for now.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
