Buy, Sell or Hold: Peabody Energy Corp.'s (NYSE: BTU) Global Dominance Is Heating Up Profit Growth

[Editor's Note: We're seeing growth in the emerging economies. And since growth equates to increased energy consumption, and increased energy consumption translates to an excellent profit opportunity for investors, it's time to take a close look at the unchallenged global king of the coal industry: Peabody Energy Corp.]

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While advanced economies are still facing high levels of unemployment, more than a billion people in emerging markets are experiencing advancing standards of living.

As these emerging economies – especially China and India -grow, there is a strong trend toward urbanization.  People are leaving the countryside for the cities in droves in order to reap the promise of the global economy.  This secular process alone places huge demands on the existing infrastructure. 

This growth is also boosting manufacturing and energy needs. China has surpassed the United States in both car production and energy consumption.  And India's Tata Motors Ltd. (NYSE ADR: TTM) launched the cheapest car in the world, the Nano, which costs roughly $2,500.  The critically acclaimed vehicle's mass appeal and affordability is creating additional congestion on India's famously overcrowded streets.  Adding more fuel to the global-demand fire, most emerging economies implemented a strong dose of infrastructure spending within their budgets as a result of the global financial crisis of 2008.

The result of all that infrastructure development, urbanization and increased consumer affluence is a myriad of new road, bridge and building construction, additional urban development, and stepped-up production of cars, home appliances and other consumer goods. All of these developments require two key ingredients to become reality: Steel and energy.

Steel production requires a hefty dose of power, itself. In fact, energy is such an integral element of economic development that energy consumption increases are almost perfectly correctly with economic growth. This correlation is so precise that multilateral organizations use it to track economic growth more precisely in countries where economic record -keeping is poor.With these factors we are seeing great visibility in terms of expensive capital -goods- expansion projects for mining – specifically coal mining – and at the same time we are seeing a powerful pick- up in coal demand .  Bulk freight rates for overseas shipments of coal are climbing once again, and coal-producing companies are reporting strong earnings and are increasing their earnings guidance for the year.

These are coincidences that one cannot afford to ignore.  This is a wake-up call to a profit opportunity in this asset sub-class.  As is our practice, we are going to play it strong and play it safe, and are going to go for the unchallenged global king of the coal industry: Peabody Energy Corp. (NYSE: BTU).

You see, the United States is the Saudi Arabia of coal, and Peabody Energy is the clearly dominant U.S. coal company.  Its superb positioning in the low-sulfur, very- low-extraction-cost Powder River Basin in the United States gives Peabody a scale, product quality and cost advantage that is simply impossible for its rivals to replicate.

But the story does not end there. 

Peabody is geographically diversified, with a few mines left in the Appalachian region where it has been divesting, as well as some in the Illinois basin.  But, more importantly, the company enjoys a very profitable and fast-growing presence in Australia. 

In 2008, profitability in Australia was spurred by a very unusual supply shortfall. That has changed. Even so, company profitability remains high – just not at the artificially assisted levels of 2008. But seaborne coal is experiencing a demand pickup, and will continue to do so, bringing Peabody a new source of p rofitability .

Australia's continued economy strengthening is good for Peabody – especially in the near term. In the long term, however, the company's commodity-supplying relationship with China and India will be an even bigger contributor to the company's growth profile – especially because those two countries have such high – but sustainable – rates of growth.

Indeed, China, India and Brazil – three of the four so-called "BRIC" economies – are advancing at robust rates, despite some recent efforts from each country to prevent overheating economy and inflation. China and Brazil have achieved soft landings and inflation in each economy is under control.  India is pursuing a similar strategy.   With growth comes the afore-mentioned demand for energy. And that means coal. Expect Peabody Energy to continue its successful twin strategies of pursuing organic growth even as it looks for acquisitions to augment this growth.

Peabody hit the ball out of the park with its latest quarterly report. The company trounced Wall Street's estimates and beat our own by a nickel a share. Even more important, however, was the fact that the company also boosted its guidance for the year. It may surprise us yet again, since the sweltering U.S. summer has bolstered electricity demand. 

And many areas of manufacturing, like automotive, are also recovering well.  U.S. carmakers are back, which we've seen in their own numbers and the numbers released by AutoNation, Inc. (NYSE: AN).  It takes a lot of energy to produce, distribute and sell cars.In further evidence of the mining sector's potential, our recent investment in Joy Global Inc. (NYSE: JOYG) is off to a great start.  We also saw its cross-town archrival Bucyrus International, Inc. (Nasdaq: BUCY) similarly beating earnings and raising guidance.  They are getting orders from abroad for yet another round of mining expansion.

Hence, our investment thesis is very strong both in the intermediate and in the long term.  What about the short term, for the traders?

Peabody Energy, like the entire commodity space, corrected abruptly since mid-April. I nvestors pulled back on the reins, waiting to see if Europe would resolve the Greek and Southern European country sovereign debt crises, and later expected some clarity on the shape of the European banking system.  Europe reacted strongly, passing comprehensive regulations  and posting aggressive- stress- test results.  The core of the European banking system is fine, and there are no systemic risks involved.

Hence, Peabody Energy's stock printed a traditional double bottom and rallied once more.  It crossed the key exponential moving averages for the 200-day, 50-day and 20-day timelines.  This is very bullish. 

What's more, long term, the stock is showing the traditional cup-and-handle pattern that is usually a very strong predictor of abnormal gains ahead.Valuation-wise, the stock is trading at 22 times earnings, which seems high, but the Price/Earnings-to-Growth (PEG) ratio, which matches the P/E ratio with growth in earnings to see how much are we paying for growth, is very low.  And, with earnings very likely to keep surprising us to the upside, we need to hop on Peabody Energy now.

Recommendation:  Buy Peabody Energy at market.  Longer-term investors should dollar-cost average into the stock over the next three weeks.

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Peabody Energy Corp. (NYSE: BTU).

[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]

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