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Martin Tillier

Martin Tillier

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A Value Play Too Good To Ignore

On June 18th of last year, I wrote a piece suggesting that selling coal stocks, and Peabody Energy (BTU) in particular would be a good idea. Not to brag, but at the time that stock was trading just below $45 and has not been higher since. Now, however, with BTU around $27, it is time to reverse that trade.

My argument then was twofold. First, from a fundamental perspective, I said that despite Donald Trump’s rhetoric and actions, the future for coal was bleak. The second point was more of a technical one, that BTU had plateaued after a run up, setting up a trade with a limited downside and big upside.

To be honest, the long-term fundamental picture for Peabody and for coal in general is still not pretty, nor is it likely to change soon. The world is simply moving away from coal as a fuel, seeing it as dirty and outdated. That doesn’t mean, however, that there isn’t money to be made by coal companies, and right now the value in Peabody is just too good to ignore.

Whatever value metric you use Peabody looks like a buy. It has a trailing P/E of just under 6 and the PEG ratio, which takes projected growth into account, is negative. (A ratio below 1 is considered to indicate value). The stock is trading at below its book value, and the price to sales ratio is just over 0.5. The company has nearly $800 million of cash on hand and generates over $647 million of free cash flow as well, so liquidity is not an issue.

The immediate value in the…

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