Earnings Preview: Peabody Q3 profits seen lower

ST. LOUIS -- Peabody Energy Corp., the world's biggest private-sector coal company, is expected to post lower earnings compared to a year ago, when it reports second-quarter results before the stock market opens Monday.

WHAT TO WATCH FOR: Analysts likely will look for whether Peabody again lowers its earnings or production outlooks, as the industry continues to grapple with weakened demand in the global economy and more utilities using cheap natural gas instead of coal to generate electricity.

In July, while announcing Peabody's lower second-quarter profits, chairman and chief executive Gregory Boyce called the market "choppy," noting "the industry experienced significant headwinds" as declining global thermal coal prices and low natural gas prices pushed up coal stockpiles at utilities.

Peabody at that time pared its 2012 coal sales expectations by 5 million tons from its projection three months earlier _ to between 230 million and 250 million tons _ and forecast lower-than-expected earnings for the third quarter.

"Peabody is weathering the macroeconomic storms well," Boyce told analysts then. Yet "Peabody is guarded in our near-term view of global market fundamentals."

"U.S. coal markets have shown some positive signals, but significant recovery is not yet at hand," Boyce added, believing U.S. coal use will rebound next year as natural gas prices rise. Those prices have rebounded lately. Earlier this month they spiked nearly 80 percent since hitting a 10-year low of $1.91 per 1,000 cubic feet in April.

Some analysts don't expect the third-quarter showings by U.S. coal producers to be much better than the last quarter. Stifel Nicolaus analyst Paul Forward wrote in a research note Friday "we expect most firms to disappoint" either in their July-September earnings or their outlook for this year's final three months. He said the latest results should reflect rapid weakening in the market for metallurgical coal used in making steel.

Still, Forward thinks investors have discounted poor results in the second half of 2012 and during the coming stream of earnings reports from U.S. coal companies "will be more interested to hear about production cuts in metallurgical or thermal coal that could allow a market recovery from the trough."

Last month Peabody, based in St. Louis, blamed weak market conditions for its decision to permanently halt production at an underground southwestern Indiana coal mine that produced 1.2 million tons of coal last year. The company expects to take an after-tax charge of about $75 million, mainly tied to a write-down in the value of the mine's assets.

Coal companies facing the prospect of more stringent environmental regulations got a boost in August, when a federal appeals court overturned a regulation clamping down on power plant pollution that contributes to unhealthy air in neighboring states. The U.S. Court of Appeals for the District of Columbia ruled that the Environmental Protection Agency's cross-state air pollution rule that as scheduled to take effect in January exceeded the agency's authority.

WHY IT MATTERS: Peabody's earnings are closely watched because the company usually is among the first of the coal sector's big players to report earnings each quarter. It gives analysts and investors a snapshot of the industry's health, including an outlook for thermal coal demand used to produce electricity.

WHAT'S EXPECTED: On average, analysts polled by FactSet expect Peabody to earn 34 cents a share on revenue of $1.96 billion. The company has forecast earnings in the third quarter at 20 to 45 cents per share.

EARLIER SHOWINGS: Peabody's profit in the second quarter slipped to $204.7 million, or 75 cents per share, from $284.8 million, or $1.05 cents, a year earlier. The April-June showing still beat Wall Street expectations. During last year's third quarter, Peabody's profit surged 22 percent to $274.1 million, or $1 per share, from $224.1 million, or 83 cents per share, a year earlier.

STOCK PERFORMANCE: Peabody shares dropped 10 percent during the quarter.