The Diamond is in Coal

Stock (Symbol)		Stock Price
Peabody Energy (BTU)		$62
Data is as of	Expected to Report	Sector
December 10, 2010	Jan 26	Energy & Commodities
Sharek’s Take
The Cheat Sheet says Energy is the place to invest in 2011, and I’m getting a jump start in 2010 by adding Peabody Energy (BTU) to the Growth Portfolio today. Economies are expanding — especially China’s. More production takes more energy. Consider these points on why I think BTU is a fitting investment: Coal supplies half the electricity consumed by Americans. 2010 is Peabody’s 40th straight year as the largest U.S. coal producer. During 2001-2006 Global coal use grew by 30% (only 5 years). Peabody is the only global pure-play coal investment. China, long a coal exporter, became a net importer of more than 100 million tonnes of coal in 2009. (source: BTU 2009 Annual Report). News today that the EPA has pushed back plans to create tougher polution controls for coal companies is a relief to investors of coal stocks. Coal plants have been targets of Democrats who push for clean energy. The problem is better polution control in coal plants is a HUGE investment. Republicans taking more control in Congress is helping coal stocks. Peabody mines coal in Amaerica, Australia and Argentina. Australia provides coal to China’s steel plants — that’s what gives BTU and edge over Arch Coal (ACI). America’s coal consumption is growing because the economy is growing again, China’s is growing either way.
One-Year Chart
BTU is a little high right now. I wish I had purchased this stock earlier, the prior breakout was $56 so the $62 price today is still close. Its obvious BTU took off when it was clear Republicans were going to take more control in Congress. I did a lot of research on this sector in last month’s newsletter, we are in the early stages of an energy upswing. I’m OK buying here.
Earnings Table
BTU’s profits have been strong for just two quarters, so I think we got in on the early end of the energy upswing. Revenue rose 21% last quarter, profits doubled. The company has been beating the street all year, but I’m not putting a lot of faith in that for the future — coal is a commodity. Commodities fluctuate. Annual Profit Estimates show BTU making around three dollars this year, four-fifty next year and five-fifty the year after — that’s exceptional profit growth and a main reason I like BTU. Future quarters look sensational, with triple-digit growth forecasted.
Fair Value
BTU had a median P/E between 18 and 22 during 2002-2006 (and also in 2009). 20 times earnings is a good place for BTU stock. This is solid upside for an energy stock.
Ten-Year Chart
Peabody has been a solid, yet volatile, stock to own during the past decade. Although the annual profits are red-and-green, the company has shown the capacity to grow. When I renew this chart next quarter, the 2000 figure will fall off and a 2011 number of around $5.50 will appear, this will make the ten-year chart look so much better.
Power Ranking	Bottom Line
Growth Portfolio 13 of 19	Energy should be a top sector in 2011, and we need to have investments in that area. I really like oil but love the profits BTU is expected to deliver during the next two years. I’m also happy that the 14 P/E is less than the 20 BTU usually sells for. I’m not an expert at energy stocks,so I want to get a feel for how this investment is going before placing BPI in my top-ten investments. Thus BTI is ranked 13th in the 19 stock Growth Portfolio Power Rankings. I thought about putting this stock in the Aggressive Growth Portfolio but I like the stocks in there now. The biggest negative is BTU is extended in the one-year chart. If this stock corrects I’ll consider adding it to Aggressive Growth Portfolio.
Aggressive Growth Portfolio N/A