We came across a bullish thesis on Peabody Energy Corporation (BTU) on Substack by Value Don’t Lie. In this article, we will summarize the bulls’ thesis on BTU. Peabody Energy Corporation (BTU)’s share was trading at $21.33 as of Dec 18th. BTU’s trailing P/E was 5.63 according to Yahoo Finance.
A coal miner emerging from a vast underground mining operation, his clothes blackened from the day’s work.
Peabody Energy Corp (BTU) represents a compelling yet high-risk investment opportunity in the coal sector, trading at a remarkably low valuation of just 3x projected 2026 EBITDA. With operations spanning both thermal coal for power generation and metallurgical coal for steel production, Peabody is a major player with significant reserves that provide over 20 years of production capacity. However, the company’s recent decision to prioritize mine development and a leveraged acquisition strategy over shareholder returns introduces both upside potential and notable risks.
The acquisition of Anglo American’s metallurgical coal assets for $2.3 billion marks a transformative move for Peabody. This deal includes four mines, three currently operational and one offline, projected to add 11.2 million tons of met coal production by 2026. Post-acquisition, Peabody’s business profile will shift significantly, with metallurgical coal expected to contribute two-thirds of EBITDA by 2026. Management highlights an attractive acquisition price of 3.1x EBITDA, incorporating $100 million in cost synergies and robust margins of $65–$70 EBITDA per ton at $225 coal prices. This positions the company for substantial long-term growth, particularly with the potential reactivation of its Grosvenor mine and development of the Centurion project, which could add an additional 6.5–7.5 million tons of production annually, representing $400 million in optional EBITDA by 2026.
Despite these opportunities, the acquisition comes with increased leverage, moving Peabody from a net cash position to $1.65 billion in net debt by mid-2025. This leverage, coupled with significant capital expenditures for mine development, leaves the company vulnerable to fluctuations in coal prices. While management remains optimistic about generating excess cash for shareholders, any missteps in execution or prolonged weakness in coal prices could erode the value proposition.
On current valuations, Peabody trades at an enterprise value of $4.35 billion, implying just 2.7x 2026 EBITDA. If the company successfully achieves its upside projections without incurring additional debt, this multiple could drop to 2.2x, unlocking significant value. A conservative target of 3.5x EBITDA suggests a potential share price of $33, representing a 50% upside from current levels, with further gains possible under optimal scenarios.
In summary, Peabody offers a call option-like investment tied to stable or rising coal prices. The stock is a bet on management’s ability to execute amidst tight margins for error, with substantial upside if conditions align. For investors seeking leveraged exposure to the coal sector’s dynamics, Peabody is a high-risk, high-reward play.
Peabody Energy Corporation (BTU) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held BTU at the end of the third quarter which was 28 in the previous quarter. While we acknowledge the risk and potential of BTU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BTU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.