Peabody Energy Corporation (BTU), Arch Coal Inc (ACI), BHP Billiton Limited (ADR) (BHP): The Major Headwind for These Companies

Further, the company competes directly with Indonesia, which is the main coal exporter in the world. This adds another problem to Arch Coal Inc (NYSE:ACI)’s export competition in the region. The company should try to enter the Indian market to try and offset a decline in revenue from China.

The big Aussie

BHP Billiton Limited (ADR) (NYSE:BHP) is a diversified miner with many resources. The company produces coal, copper, and even Uranium. The company trades at a price-to-earnings ratio of 16.1, well below the industry’s average of 48.3. The company’s revenue has declined 10% to $66 billion in the trailing-twelve months compared to last year. Its net income shrunk to $9 billion from $15 billion.

Several analysts suggest that BHP Billiton Limited (ADR) (NYSE:BHP) may be a dividend play because it offers a 4% yield. However, I believe this is not a wise idea. If net income and revenue are shrinking, the company may end up having issues paying its obligations.

Its free cash flow has been contracting since 2011, when it jumped from $7 billion to $18 billion. If we remove that year, its free cash flow has been shrinking since 2008. What’s more is that the company posted a free cash outflow of $6 billion from an inflow of $3 billion. If this continues this way, I would not be surprised if the company slashes its dividend payment.

Investors also need to look for economic improvements in China. One tailwind for the company comes from its copper mining business. China’s urbanization plans include an ambitious plan for the construction of homes. BHP Billiton Limited (ADR) (NYSE:BHP) could benefit from a stronger demand for copper in China in the coming months. However, we should wait until such strength for copper is present in the market. Otherwise, investing in this company should be regarded as a speculative play.

The Foolish message is…

The demand for coal is still weak. Thus, investors should steer away from these companies as long as China’s manufacturing activities do not improve. The coal surplus will affect the exports from Peabody Energy Corporation (NYSE:BTU) and Arch Coal Inc (NYSE:ACI). Lastly, BHP Billiton Limited (ADR) (NYSE:BHP)’s coal sector may continue to underperform, but the company’s revenue may be partially helped by a stronger demand for copper if China continues with its urbanization plans.

Robinson Roacho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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