Before market opens on Tuesday, one of the world biggest coal producer, announce reported earning for the fourth quarter and full-year 2008.

OVERVIEW

Shares of major coal mining companies – in many cases the darlings of the energy sector in recent years – have been under pressure lately as investors worry about the slumping steel industry and the recession’s effect on some 2010 contract negotiations.

While many analysts have cut price targets for Peabody and several other big players in the sector, observers figure the massive stimulus package planned by the Obama administration could help by bolstering spending on infrastructure projects – repairing roads and bridges and advancing energy efficient programs_ that could bolster business for miners.

Bill Selesky, an analyst with Argus Research said this plan likely will generate growth in the steel industry, which is good news for Peabody and other companies that mine metallurgical coal, used in making steel.

Peabody announced this month it was cutting its production in Wyoming and Australia because of the global economic downturn.

The company said it expects its mining in Wyoming’s Powder River Basin to produce about 10 million tons less than last year, bringing it in line with expected demand while addressing excess customer inventories. Those pullbacks, Peabody said, will be concentrated in lower-quality, lower-margin coal products, and equipment will be relocated to other sites.

The company also said its Australia metallurgical coal production will be trimmed by 2 million tons because of a drop in global steel demand. Peabody’s Australia production now is expected to be 22 to 24 million tons this year, compared with 2008 sales of roughly 24 million tons.

Analysts considered the production cuts unsurprising, citing them as reasons why they recently were trimming their price targets.

Still, Stifel Nicolaus & Co. analyst Paul Forward said he was maintaining a “buy” rating on Peabody shares and a $39 price target, telling clients in research note this month that Peabody’s production cuts were “a necessary step toward balancing 2009 U.S. coal supply with weaker demand.”

Last month, Peabody said it has chosen a site in western Kentucky for a proposed multibillion-dollar coal-to-gas plant the miner plans with Houston-based ConocoPhillips, which will provide the coal gasification technology. The companies say they have filed an air permit with the state.

In October, Peabody said its board of directors doubled the size of its existing share repurchase program to $1 billion. The buyback program, which began in 2005, doesn’t have an expiration date.

BY THE NUMBERS

Analysts polled by Thomson Reuters expect, on average, earnings per share of 74 cents and revenue of $1.71 billion. For the full year, analysts forecast earnings of $3.22 per share on revenue of $6.37 billion.

During the same quarter in 2007, Peabody earned $35.8 million, or 13 cents per share – a showing that reflected the heavy charge Peabody incurred by spinning off Patriot Coal Co. in October 2007. The company’s earnings from continuing operations that quarter, which excludes some one-time items, was $191.1 million, or 71 cents per share.

For all of 2007, Peabody posted a profit of $421 million, or $1.56 per share.

ANALYST TAKE

Last week, Caris & Co. analyst Ann Kohler cut the price targets and earnings estimates for Peabody to $33 from $53, citing lower global coal demand, hefty inventories and weaker-than-expected prices in 2009 and 2010. The collapse in natural gas prices, despite a severe cold snap across much of the United States, only weakens coal fundamentals further, Kohler wrote in a research note.

“Although numerous domestic coal producers have announced the closure and idling of mines, we believe that the continuing decline in industrial and electric demand caused by the deepening recession will require additional shutdowns,” she wrote.

Barclays Capital analyst Peter D. Ward also recently cut Peabody’s 2009 estimate to $3.65 from $6.45 and its 2010 estimate to $4.65 from $7.30.

“We believe the key for investors will be management commentary on contract negotiations for 2010 tonnage,” Ward wrote in a note to clients. “Clearly, we expect prices will be much lower. And, we have adjusted our estimates and target prices accordingly.”

Peabody has a sector-leading 9 billion tons of reserves. Its coal fuels roughly one-tenth of all U.S. electricity generation and more than 2 percent of worldwide electricity. Peabody had $4.6 billion in revenue on sales of 238 million tons in 2007.

WHAT’S AHEAD

Analysts expect to be closely watching the latest batch of earnings reports for corporate guidance about contracts for this year and next – and the prospects of additional production pullbacks.

The sector’s earnings parade beginning this week “is likely to contain more curtailment disclosures,” said Daniel Scott, an analyst with Dahlman Rose & Co. “U.S. miners have been historically reluctant to cut back in the face of declining prices, as the industry was fragmented and debt service needs often dominated output decisions. This go-round, however, we are optimistic producers will make significant reductions.”

Scott says the coal industry “is coming off a year of record contract pricing and can boast a relatively strong collective balance sheet, taking some of the past pressures out of the equation.”

STOCK PERFORMANCE

Peabody shares fell about 45 percent to $22.75 during the fourth quarter. For all of 2008, shares slid 63 percent.

source : Associated Press

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