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Peabody shares jump on big earnings surprise

by Fui Tsikata
Oct 16, 2008

Shares of Peabody Energy Corp. surged 18 percent after the company reported record earnings in the third quarter that far surpassed analysts’ expectations, due to strong sales in Australia and price hikes for its Illinois Basin and Powder Basin coal.

The St. Louis-based coal company posted a net income of $369.6 million, or $1.36 per diluted share, compared with $32 million or 12 cents per diluted share in the same period a year ago. Analysts had been expecting earnings of 87 cents. 

Revenues rose 59 percent to $1.91 billion from $1.2 billion.

Peabody paid an effective tax rate of 14 percent, lower than the estimated 25 percent predicted by UBS AG. This was caused by movements in exchange rates and effectively reduced income tax expense by $63 million. UBS in its research note said, “We anticipate the benefit will partially reverse itself in the fourth quarter.”  Furthermore, “Trading and brokerage also contributed, as segment results surpassed expectations.”

Peabody’s production increased to 66 million tons in the quarter, a 6 percent increase from the year-earlier period. The revenues from its Australian operations were $789 million, a 156 percent increase.

The demand for coal allowed the company to raise prices for its Illinois Basin coal and Powder Basin coal, accounting for the sharp rise in revenues. The U.S. operations of the company produced 15.5 percent more in the third quarter compared with the same quarter in 2007.

On the back of such strong results, Rich Navarre, president and chief commercial officer said in a conference call, “We look forward to continuing to deliver improving results and capitalizing on our financial position within this market.”

Greg Boyce, CEO, added that the company was looking to take advantage of its strong position by looking out for potential acquisitions. 

In the nine months ended Sept. 30 Peabody's earnings rose to $660 million, or $2.53 per diluted share, from $228 million, or 88 cents per diluted share.

Revenues climbed to $4.7 billion from $3.4 billion.

Peabody executives stated in the conference call that despite the expected tax drag in the current quarter, they  expect to post a strong profit.  In last year's fourth quarter the company earned $35.8 million or 13 cents per diluted share.

UBS reiterated its buy rating on the stock and maintained its 12-month target price at $70.

Peabody closed Thursday at $28.68, up $4.44.