Size matters when it comes to extraction, and Peabody takes the cake. Margins have tightened over the past couple years, but Peabody has managed to maintain an impressive lead on its competitors, paving the way for more dollars to hit shareholders’ pockets in the years to come.
But margins don’t mean a thing if no one’s buying. U.S. utilities have been starstruck with natural gas prices in recent years, and domestic coal consumption for electricity generation is expected to drop 20 million tons between 2011 and 2016 . U.S. policies on coal are a grey area, sending more mixed messages than a middle school sweetheart. “Clean coal” has been lauded by President Obama as a vital part of America’s energy independence, but emissions controls continue to put it on the naughty list.
While the domestic outlook is precisely why Arch, Alpha, and James River have been dumped in Mr. Market’s garbage bin, Peabody’s prospectus looks altogether different. International demand is booming as China, India, and the E.U. continue to increase their coal consumption. 73% of this new demand comes from China alone, where Peabody has established business connections and is the only foreign participant in the country’s GreenGen project. China currently generates 80% of its electricity from coal, and increased steel production could continue to drive up coal consumption in the years to come.
Risky business
Peabody’s stock has been pushed down by a sectorwide exodus, even as the company’s size and global position should put it in bulls’ backyard. Looking ahead, coal investors will need to keep an eye on two main issues: natural gas and international policy. Gas prices will dictate the future of coal, and advances in liquefied natural gas (LNG) technology could also put pressure on currently untouched coal exports. Policy decisions in China, India, and other developing countries could further influence the cost effectiveness of coal as these countries consider cracking down on carbon emissions.
Foolish bottom line
Coal companies are cheap for a reason, but the fire-sale days may soon be over. Investing in Peabody means investing in a low-risk company in a high-risk sector, a match made in heaven for contrarian growth and value investors.
The article Pennies on the Dollar: Is Coal Ready for a Comeback? originally appeared on Fool.com and is written by Justin Loiseau.
Fool contributor Justin Loiseau has no position in any stocks mentioned. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool has no position in any of the stocks mentioned.
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