Initiating with Neutral Rating and $38 TP
Macarthur Dilution Is Key
Concern as PCI Prices Weaken
March 1, 2012
Relative rating
Starts at Neutral
Target price
Starts at USD 38.00
Closing price
February 27, 2012 USD 35.52
Potential upside +7%
Initiating Coverage on Peabody with Neutral Rating and $38 TP
We are initiating coverage of Peabody (BTU) with a Neutral rating, as we see
downside risks to 2012 EPS estimates, owing to weakening coking coal
prices for HCC and, especially, PCI, coupled with significant earnings dilution
from its recent Macarthur (MCC) acquisition. BTU’s many positives include
a strong management team, substantial reserve base and large suite of
growth projects. Our Neutral rating reflects more our concern with BTU’s
ability to generate profitable growth as coking coal and PCI prices revert to
more-normalized levels and cost headwinds at MCC potentially linger into
2013, reducing the probability of accretion.
Execution with MCC Integration Critical for Success
Execution around the MCC acquisition will be critical to Peabody’s
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