Peabody Energy (BTU), a coal company, has not been able to avoid the recent pullback in their sector. After having been steeped in the views of Peabody management during a recent road-trip, however, FBR says the stock is going to over $100:
We traveled with senior management of Peabody Energy and came away more convinced that the strength in fundamentals is sustained despite the appearance of a global slowdown and an expectation of falling natural gas prices. While the stocks are more worried about the downside, we remain overall bullish on coal stocks and use these pullbacks to build new or bigger positions.
The key takeaways from the trip were:
(1) China is slowing but has seen little evidence that coal fired generation growth is abating (about 80 GWs to be built in 2008, ahead of our forecast of 75 GWs)
2) PRB is being exported to new places such as Europe
(3) PRB contract market should be deep enough to lock in contracts above the curve
(4) utilities and steel buyers continue to start dialogue on new contracts requests.
At present, Peabody Energy trades at 5.4x 2009 EV/EBITDA estimates versus 4.9x for the coal
group. The thesis for owning Peabody is centered in the company’s ability to: grow production over time, capture a rising price environment, improve met coal production, and find strategic acquisitions.
FBR reiterates OUTPEFORM on Peabody Energy (BTU), target $104.
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