Peabody Energy Poised to Lead a Recovery Among Recently Depressed Coal Stocks, Analyst Says

Peabody Energy Poised to Lead a Recovery Among Recently Depressed Coal Stocks, Analyst Says

Although coal companies have faced strong headwinds in recent months, an analyst at Citigroup said ingredients for a recovery loom, making it a good time to buy one of the industry’s best names.

In a client note Friday, John Hill initiated coverage on Peabody Energy Corp. at “Buy” with a target price of $48, saying he sees a positive story unfolding for the stock.

For starters, coal companies this year have faced a number of challenges, such as softer spot prices, rising inventories at coal utilities due to mild weather, relatively low prices for natural gas, greater hydroelectric and nuclear generation and the cost and productivity implications of mining accidents.

Those factors have combined to send shares of St. Louis, Mo.-based Peabody down by nearly half since May of last year. Shares of other coal stocks followed suit.

But Hill said a recovery looms, as several mines in the Central Appalachian region face closing and energy consumption in the U.S. will rise this year. Hydroelectric generation, buoyed by snowpacks, will likely fall this year and drive the coal burn even higher.

In addition, power generation economics overwhelmingly favor coal, particularly the Powder River Basin variety from the West, where Peabody is concentrated.

Longer term, the analyst added, coal stands to benefit from gasification and coal-to-liquids technology, a segment where Peabody commands a leadership position.

“This is important for sustainability and stewardship issues, energy security, and the effort to enhance rather than surrender coal value in a carbon-constrained future,” Hill observed.

Peabody has also recently made strategic acquisitions in Asia, which will add to earnings in 2007, as will an improving pricing environment for Powder River coal and volume boosts from its specialized plays in the Illinois Basin and Australia.

“We see a positive multiyear thesis for Peabody shares,” Hill said.

Peabody’s shares rose 47 cents, or 1.2 percent, to $38.70 in premarket trading.

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