For investors who bought shares of Peabody Energy (BTU) at the beginning of the year, its shares have been like a lump of coal in Christmas stocking. But Goldman Sachs sees a much happier outcome in the future.
Goldman Sachs’ positive view on some coal stocks comes as Credit Suisse reassesses refiners.
Bloomberg News Goldman analyst Neil Mehta and Vinit Joshi explain why they raised their rating on shares of Peabody Energy:
We upgrade shares of Peabody Energy (BTU) to Buy from Neutral with 31% total return (including dividends) to our 6-month target price of $26. Four factors underpin our positive view of BTU: (1) the potential for continued cost cutting and volume growth in Australia, (2) the bottoming in met coal prices, (3) improving cash flow and (4) attractive relative and absolute valuation. Even after outperformance in the last three months, BTU has still lagged the S&P500 by over 50% in the last 12 months and 110% in the last 3 years.
Mehta and Joshi also took a look at what they see as the big themes in the coal sector: Cost cutting, restructuring and balance sheets. They make some recommendations:
Own cost-cutting winners, including Buy-rated BTU. Other companies with strong
cost control potential include Neutral-rated [Walter Energy (WLT) and Alpha Natural Resources (ANR).]
Buy restructuring stories, including Buy-rated [SunCoke Energy (SXC)]. We see high potential that SXC drops down coke-making assets from the parent to its MLP in 1Q2014, as suggested by management commentary.
Avoid companies with weaker balance sheets, including Sell-rated [Arch Coal (ACI)].
Peabody has gained 3.7% to $20.81, Walter has risen 7% to $18.57, Alpha Natural has advanced 4.3% to $7.99, SunCoke is up 3.3% at $21.24, and even Arch Coal is surging: It’s gained 6.4% to $4.48.
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