Peabody Energy Corporation (BTU), Arch Coal Inc (ACI): Market Cap Vs. Enterprise Value of Coal Stocks

Page 1 of 2

Investors looking to play a beaten down sector like coal need to understand the difference between Market Cap, “MC” and Enterprise Value, “EV.” Most investors recognize MC, the number of shares outstanding multiplied by the share price. This simple metric serves investors well if there’s not much debt on the balance sheet.

In short, market cap ignores debt on the balance sheet

Peabody Energy Corporation (NYSE:BTU)

However, if a company employs debt, then MC alone will not suffice in comparing investment opportunities. EV = MC + debt – cash (& cash equivalents). Therefore, EV explicitly takes into account debt and cash, both of which are of vital importance these days. Peabody Energy Corporation (NYSE:BTU), Arch Coal Inc (NYSE:ACI) and Walter Energy, Inc. (NYSE:WLT), stocks are down 81%, 94% and 91%, respectively, from all-time highs. Naturally, these stocks may appear to be quite cheap or oversold.

Comparing EV to MC puts these dismal stock charts into perspective. Back in 2008, Peabody Energy Corporation (NYSE:BTU) traded at an all-time high of $88 per share, on 272 million shares, for a MC of $24 billion. Friday, the share price was $16.8 and there are 270 million shares, for a MC of $4.5 billion. Looking at EV, at Peabody’s peak, the EV = MC + (debt-cash) was $27 billion! of which the (debt-cash, aka, “net debt”) component was $3.2 billion. Thus, net debt was 11% of Peabody’s total EV.

The Relative proportion of debt as a percentage of EV has soared

Friday, Peabody Energy Corporation (NYSE:BTU)’s EV = MC of $4.5 billion + net debt of $5.5 billion = $10 billion. Therefore, while Peabody Energy Corporation (NYSE:BTU)’s stock price is down 81%, it’s EV is, “only” down 63%. While that might not seem very helpful to know, that’s just part of the story. It’s essential to also understand the relative weight of the net debt in the capital structure. From 11%, that figure has spiked to 55%. Therefore, the relative weight is up by a factor of 5.

Without any further calculations, one can see that the financial strength of Peabody Energy Corporation (NYSE:BTU) has plunged along with its stock price. Therefore, the earnings multiple an investor should be willing to pay is lower. This is an essential exercise for framing the rebound potential of Peabody Energy Corporation (NYSE:BTU)’s stock. Will this stock bounce back into the $80′s? Not a chance. Earnings prospects are far weaker and relative net debt is 5 times higher. Investors hoping for a 3-5 times stock return in Peabody are in for a big disappointment.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!