Peabody Energy Corporation (BTU) engages in the business of coal mining. The company was founded by Francis S. Peabody in 1883 and is headquartered in St. Louis, MO.
As of 14 Mar 2022, Peabody Energy Corporation's stock is currently trading at $19.9 and is up by 75% year-to-date (YTD). Over the past year, the stock is up by 391% whilst the S&P 500 is up by 7%, meaning the stock has significantly outperformed the market by triple digits over this period.
But is Peabody Energy Corporation worth considering as a long-term investment opportunity?
Why are fundamental metrics important?
Over the long term, the price of a company's stock is usually tied to its fundamentals, and it therefore makes sense to start by looking at Peabody Energy Corporation's fundamentals when we are considering if the company has the makings of a good long-term investment.
By 'fundamentals', we mean a set of key metrics including price to earnings ratio (P/E ratio), earnings per share (EPS), price to sales ratio (P/S ratio) and debt. When looked at together, fundamentals can tell us whether or not a company is likely to be a good investment both now and in the future, based on previous trends.
What do Peabody Energy Corporation’s fundamentals tell us about the investment opportunity? Let's have a look.
Peabody Energy Corporation's key metrics
EPS is the first metric we'll look at, and this is used by investors to gauge the profitability of a company on a 'per share' basis. It is calculated as net income (after dividends on preferred stock) divided by the number of outstanding shares.
Based on its most recent financial statements, Peabody Energy Corporation has EPS of 3.22, and year-on-year, the company's EPS increased by 117%. This is encouraging growth.
Another key metric to look at is the P/E ratio because it tells a potential investor how cheap or expensive the stock is by indicating how much investors are willing to pay for a company’s earnings, and it is calculated by taking the price of a stock and dividing it by the earnings per share. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates it might offer more value.
Peabody Energy Corporation has a P/E ratio of 7.16, based on its most recent financial statements. This is 25% lower than the average P/E ratio across its industry, which is 9.5, indicating that the stock is fairly inexpensive in relation to its earnings.
Next, let's look at one of the most common valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
Peabody Energy Corporation's P/S ratio is currently 0.74, and this is 34% lower than the sector-wide average of 1.1. The fact that it is currently below the sector-wide average is a positive sign, and indicates that the stock may offer more value compared to other companies in the same sector.
Another key metric to look at is a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
Based on its most recent financial statements, Peabody Energy Corporation's P/BV is 1.74, which is 80% lower than the industry benchmark of 2.2. This is another encouraging sign that the company is on the right track.
Finally, when analyzing a company as an investment opportunity, you should always take a look at how much debt they have on its books, as this can help you assess how risky a company is. Carrying a large amount of debt can be a big ‘red flag’ if the company is not generating enough free cash flow to service the debt.
As of 14 Mar 2022, Peabody Energy Corporation has total debt of $1181M, which has fallen by 27% over the past year, and it also has Cash & Short-Term Investments totaling $954M on hand, giving the company a 'net debt' of $227.1M.
In the short term at least, this is more than serviceable, and it’s encouraging to see that the company is not relying on debt to fund its operations.
Is Peabody Energy Corporation a buy?
In summary, we like what we saw when we looked at Peabody Energy Corporation's stock.
To be more specific, the stock is up by 75% YTD and the company has a lower P/E ratio, lower P B/V and lower P/S ratio compared to competitors within the same industry.
Moreover, the stock is up by a phenomenal 391% over the past year and is showing positive EPS growth y/y. That’s what we like to see, and it makes us bullish that the company is on the right track.
With all of this in mind, we think the future is bright for Peabody Energy Corporation and the stock could make a good addition to any balanced portfolio.
As with any stock however, there are additional factors to consider before making an investment decision. This article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long-term outlook. Please do your own due diligence before buying shares.
Peabody Energy earnings for Q1 2022, are due Thursday, 28 April.