A Coal Stock Ready To Soar
This past June, I turned another year older. Yep, I celebrated my birthday. No I won’t tell you how old I am. Let’s just say I’m getting birthday cards comparing me with fine wines.
One thing I like to do on my birthday is review my “bucket list”. It’s a list of things I want to do before I… well… kick the bucket. Right at the top of my list is visiting the “Land Down Under”.
When I think of Australia, I dream of relaxing on the beautiful white sand beaches… immersing myself in the sparkling water… and spending countless hours observing exotic marine life.
But Australia has much more to offer than pretty scenery.
The country offers tremendous investment opportunities as well.
Australia’s economy is growing at a robust 3.5%. Per capita GDP is higher than the UK, Germany, and France. And the country has low levels of unemployment and inflation.
Commodity exports are driving this rapid growth. Australia is very rich in a variety of natural resources. They’re a major exporter of wheat, wool, iron ore, gold, liquefied natural gas, and… coal.
Here’s where it gets interesting…
Demand for Australian coal is surging thanks to China.
China is the world’s biggest consumer of coal. Although the country is also the biggest producer of coal, they consume more than they can produce. As a result, the Chinese are importing more coal from Australia every year.
Many believed Chinese coal imports would drop this year as their economy slowed. But that’s not the case. As I’ve said in prior DWR articles, even though China’s economy is slowing, annual GDP growth of 9% or 10% is still huge.
With growth like that, China needs vast amounts of both thermal coal and metallurgical coal. Thermal coal is used by the country’s power plants to generate electricity. And metallurgical coal is used to make steel.
What’s driving China’s voracious appetite for coal?
Simply put, China needs thermal coal to provide electricity to the country’s 1.3 billion people. And they need it to power their many factories. The country relies on coal to generate two-thirds of their electricity needs.
And China consumes a lot of electricity.
According to the International Energy Agency, China has just replaced the U.S. as the biggest consumer of energy in the world. This is a major milestone. The U.S. held that distinctive honor for over 100 years!
China needs metallurgical coal to fire their steelmaking plants.
Thanks to years of economic prosperity, hundreds of millions of Chinese now have money to spend. They want housing, cars, electronics, and appliances. All of these require huge amounts of steel.
The upshot is China’s coal demand is very strong and imports will likely continue at a record pace.
This bodes very well for one American coal producer. Say hello to Peabody Energy (BTU).
Peabody is the world’s largest private-sector coal company. They provide thermal coal to electric utilities and metallurgical coal to industrial customers. The company owns interests in 28 coal operations in the U.S. and Australia.
Last year, Peabody shipped 255 million tons of coal worldwide. The company’s products fuel approximately 10% of America’s and 2% of the world’s electricity.
After a weak first half, the shares are poised for a rally.
Here’s why…
The company just reported blowout second quarter numbers. Revenue jumped 24% to $1.66 billion. Net income surged 160% to $206.2 million. And earnings more than doubled to $0.76 per share.
Best of all, earnings beat estimates by more than 20%!
Management credits the strong quarter to rising Chinese demand and higher production from their Australian mines. Year-to-date, China’s imports are double last year’s. And Australian exports are up 15% over record 2009 levels.
Plus, the outlook for the rest of 2010 is very good.
Management sees coal demand rising in Asia and the U.S. And they see coal prices increasing due to a shortage of coal supply. As a result, they’ve raised earnings guidance to a range of $2.60 to $3.15 per share.
Here’s the key…
Management’s earnings guidance is usually conservative so there’s upside to their forecast. I expect estimates will creep higher in the weeks ahead. And Peabody’s share price will move higher as well.
Take a look at Peabody Energy for your own portfolio. It’s a great way to profit from China’s insatiable demand for Australian coal.
Category: Stocks
