The Market Is Betting Big on BTU - What's the Catch?

Thermal coal company Peabody Energy is taking Wall Street by surprise today, surging to $25.91 and marking a 11.5% change compared to the S&P 500, which barely moved today with a 0.2% change. BTU is still -8.77% below its average analyst target price of $28.4, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Peabody Energy shares have outperformed the S&P 500 by 97.1%, with a price change of 94.2%.

Peabody Energy is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.

As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 8.37, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

Peabody energy's trailing 12 month P/E ratio is 4.4, based on its trailing Eps of $5.92. The company has a forward P/E ratio of 4.1 according to its forward Eps of $6.27 -- which is an estimate of what its earnings will look like in the next quarter.

Unlike earnings, gross profits margins are caclulated on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. Namely, a wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

In BTU's case, the gross profit margins are 27.1%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.

The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently form their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cashflow, which for Peabody Energy is $201,187,504.

This represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow, BTU is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Peabody energy's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.7, and is slightly above the average P/B ratio of the energy sector, which stood at 1.35 as of the second quarter of 2022.

As of second quarter of 2022, Peabody energy is likely a fairly valued stock since it has a very low P/E ratio, an above average P/B ratio, decent profit margins, an analyst consensus of some upside potential, and strong cash flows. We hope this preliminary analysis will encourage you to do your own research into BTU's fundamental values -- especially their trends over time. Be sure to subscribe to our free newsletter for more US equity analysis delvered to you daily!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.