Peabody Energy: I Want to Believe

Peabody Energy (BTU) shares continue to fall more on a weekly basis.  Mastery favorite Patriot Coal (PCX) is bankrupt leaving its shareholders with nothing proving coal companies are an extremely risky investment.

Patriot Coal is the first U.S. coal producer to throw in the towel and declare bankruptcy. The 500 pound gorilla issue for coal companies is something cleaner, more abundant and cheaper - natural gas. Coal is no longer king, its domestic demand is at a 24-year low in the U.S..   Natural gas is the new king and its going to continue to pressure even the best U.S. coal companies like Peabody Energy (BTU).  In 2012 Peabody shares are down 33%.  It gets worse when you go back to April of last year when Peabody was trading around $72 a share.  Fast forward to today's $22 share price and its a 70% decline for Peabody Energy since Spring of last year.

To put it bluntly, coal prices and demand has been punished and them some.  Via Fool.com and according to the EIA’s Electric Power Monthly, 445 million megawatt-hours of energy were produced from burning coal in the first four months of 2012. In the first four months of 2011, coal was used to generate 568 million megawatt-hours, meaning one of the primary sources of domestic coal demand has fallen about 20% in one year. This decline was caused by a huge increase in U.S. natural gas production (source:fool.com).

MASTERY Bottom line:

Peabody shares may have yet to hit the bottom.  Its going to get worse before it gets better for Peabody and its friends. 

However its time to add this stock to your watch list after it hits a new 12 month low (only 7.5% to go).  Peabody Energy also pays a 1.5% annual dividend and trades with a P/E ratio of 6.

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