We are moving Peabody Energy (BTU) to Sell. The company reported a third quarter loss from continuing operations of $(0.66)/share, much better than consensus estimates of a $(0.92)/share loss. Adjusted EBITDA of $95.4 million was about 56% higher than the consensus estimate. Impressively lower costs helped reduce its losses. The company reported negative cash flow from operations before any spending on mine maintenance.
Despite improving natural gas prices and rising steel production, Peabody will not be able to generate enough profit soon enough to avoid further erosion of its already-dwindling equity value. The company is struggling to stave off a debt restructuring, as it stated it will not be able to meet its minimum required leverage ratio under its revolving credit agreement. Peabody has already narrowly held off its surety bond providers regarding its mine reclamation claims.
With today’s earnings report and the price jump on the Covid vaccine news, we are taking this opportunity to exit our Peabody Energy position with an 87% loss.
We are also moving Weyerhaueser (WY) to Sell. We discussed in our recent earnings note that the company is highly dependent upon the continued surge in lumber prices to support its profits, as nearly all other segments have shown minimal improvements over the past few years.
At the margin, rising interest rates (as they are today) on the Covid vaccine news and any flattening of incremental demand for housing would tame the demand for lumber enough to incrementally diminish Weyerhaeuser’s lumber profit outlook.
The advanced age of this Buy recommendation, such that the stock now trades on commodity prices and not a turnaround, per se, influences our decision, as well.
Since our April 2012 recommendation, Weyerhaeuser has produced a 73% return, based on mid-day prices today.