One of the cheapest stocks in our Large Cap 1000 Stock Screener is Peabody Energy Corporation (NYSE: BTU).
Peabody Energy Corporation (Peabody) mines and sells coal though 26 coal mines in the United States and Australia. Peabody also markets and brokers coal, both as principal and agent, and trades coal and freight-related contracts through offices in China, Australia, the United Kingdom, Germany, Singapore, Indonesia, India, and the U.S. The company has more than 7 billion tons of proven and probable coal reserves.
A quick look at Peabody’s share price history below over the past twelve months shows that the price is up 90%, but here’s why the company remains undervalued.
The following data is from the company’s latest financial statements, dated March 2018.
The company’s latest balance sheet shows that Peabody has $1.417 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $1.368 Billion in long-term debt, $87 Million in short-term debt, and $41 Million in Minority Interests. Therefore, Peabody has a net debt position of $80 Million (cash minus (total debt + minority interests)).
If we consider that Peabody currently has a market cap of $5.663 Billion, when we add the net debt totaling $80 Million that equates to an Enterprise Value of $5.743 Billion.
If we move over to the company’s latest income statements we can see that Peabody has $703 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.17, or 8.17 times operating earnings. That places Peabody squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Peabody generated trailing twelve month operating cash flow of $1.377 Billion and had $209 Million in Capex. That equates to $1.168 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 20%.
In terms of Peabody’s annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $3.606 Billion in equity for the quarter ending December 2017 and $3.610 Billion for the quarter ending March 2018. If we divide the combined total of both numbers by two we get $3.608 Billion. If we consider that the company has $605 Million (ttm) in net income attributable to shareholders, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 17%.
In summary, Peabody is currently trading on an Acquirer’s Multiple of 8.17, or 8.17 times operating earnings. The company has a strong balance sheet with $1.417 Billion in total cash and cash equivalents. Peabody generates a FCF/EV Yield of 20% (ttm), including $521 Million in free cash flow last quarter, the highest in the past three years. The company has an annualized return on equity of 17% for the quarter ending March 2018 and provides a shareholder yield of 6%. All of which indicates that the company remains undervalued.
Superinvestors currently holding positions in Peabody Energy
Superinvestors currently holding positions in Peabody include Paul Singer, Jim Simons, David Tepper, Steve Cohen and Paul Tudor Jones.
More About The Large Cap 1000 Stock Screener (CAGR 19.3%)
From January 2, 1999 to November 29, 2017, the Large Cap 1000 Stock Screener generated a total return of 2,797 percent, or a compound growth rate (CAGR) of 19.3 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 320 percent, or 6.3 percent compound, over the full period.
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