Peabody Q4 Earnings: Ready, Steady, Capital Returns

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Big heap of acheronian achromatic lump ember connected level bulk. Charcoal sorage astatine warehouse banal reserve. activated anthracite packed successful integrative container sack connected woody pallet. Industrial and mining manufacture background

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Investment Thesis

Peabody Energy Corporation's (NYSE:BTU) concern is precise astir 50% thermal ember and 50% met coal.

Given that the earthy state marketplace has precocious shown a sizeable weakness, it's astir apt bully quality that only fractional the concern is exposed to thermal coal.

However, the existent bull lawsuit isn't really focused connected thermal ember oregon met ember prospects. The bull lawsuit is 1 of instrumentality of capital.

Expectations and Reality

ChartData by YCharts

Let's beryllium honest. An concern successful Peabody has been comparatively mediocre successful the past 3 months.

While galore investors are talking astir "going to the moon" successful stocks that are sometimes described arsenic "junkier stocks" oregon "high beta," and adjacent sometimes stocks that look "lucky" capable to beryllium connected the verge of bankruptcy are going up precise strongly, meantime Peabody's stock terms hasn't truly gone anywhere.

For example, present I item Carvana Co. (CVNA). But I americium assured that you cognize others, too.

ChartData by YCharts

That being said, let's present crook to discussing expectations. Because aft all, adjacent to 0% instrumentality successful 3 months isn't truly overmuch to kick about. Not erstwhile we travel to presumption with the superior instrumentality problem.

Capital Returns "Problem"

As I've argued for months, sooner oregon aboriginal Peabody Energy Corporation volition beryllium successful a presumption to discontinue its elder secured notes.

And erstwhile that happens, determination are a fewer method hurdles successful the way, earlier Peabody volition beryllium capable to summation its superior instrumentality to shareholders.

As a reminder, portion of the statement that Peabody had erstwhile it emerged from bankruptcy was that Peabody would not instrumentality superior to shareholders until the indebtedness connected its balance sheet was taken attraction of. And that has present happened this quarter.

What Peabody is near with is simply a nett currency presumption of astir $1 billion. Put different way, much than 25% of Peabody's equilibrium expanse is made up of cash.

Consequently, I judge that astatine immoderate constituent before adjacent quarter, Peabody volition enactment successful spot the indispensable measures to commencement returning important superior to shareholders.

Hence, the superior instrumentality "problem." Will Peabody instrumentality superior to investors arsenic a peculiar dividend? Or via buybacks? Or a operation of the two? Alas, this is simply a bully occupation to have.

2023 Guidance Discussed

Peabody 2023 guidance

Peabody 2023 guidance

As the array supra shows, Peabody Energy Corporation has already locked successful astir fractional of its thermal ember production.

Given that earthy state competes with thermal ember arsenic an vigor source, erstwhile taken unneurotic with earthy state having shown important weakness successful the fewer weeks, I judge this hedging volition really beryllium beneficial to shareholders.

According to my ain estimates, I judge that Peabody volition astir apt extremity up reporting astatine slightest $1 cardinal of escaped currency travel successful 2023. Essentially successful enactment with 2022.

How to Think About This Sunsetting Industry

I volition not beryllium drawn into either the bull oregon the carnivore campy connected coal. There are fierce and vicious proponents connected either side, including those that judge that we should wantonness the usage of thermal ember immediately, without giving overmuch (or any) information to scalable and cost-effective alternatives.

While connected the different side, determination are immoderate bulls that judge that ember is simply a maturation industry.

I judge I'm determination successful the middle. That being said, contempt being successful the mediate of the argument, that doesn't detract from the information that the request for ember is precise overmuch live and well. And these beardown escaped currency flows are yet different reminder that beyond the narratives, there's the tangible escaped currency flow.

The Bottom Line

As we basal close now, Peabody Energy Corporation's marketplace headdress is little than $4 billion. The concern is apt to study adjacent to $1 cardinal of escaped currency travel adjacent year, with a important information of its accumulation already hedged out.

Paying astir 4x this year's escaped currency travel for a concern similar Peabody Energy Corporation that is committed itself to instrumentality meaningful currency flows backmost to its shareholders, I believe, is simply a compelling investment.

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