Stock to Watch: Peabody Energy

Peabody Energy (BTU) and the entire coal sector has fallen off a cliff.  Since last summer BTU's share price has been cut in half. 

Peabody trades for $30 a share and sports a 1.2% annual dividend yield.   There's no denying the coal industry is in trouble, prices for Appalachian coal are down 24% over the past 12 months.  Coal is cheap and so is Peabody with its P/E Ratio of 8.1 and EPS of 3.52.

There are plans to cut coal power generation, its too dirty and its going to hurt Peabody who is America's largest coal producer.  Natural gas with its ultra cheap price and abundant quantity is killing coal.  For more on natural gas stock picks check out 3 Natural Gas Stocks to Watch.  However Peabody Energy is not dead by any means and its best of breed in the coal sector.

Last week Howard Weil upgraded Peabody to "outperform" and kept its $51 target price on the stock.  That's a bold prediction but if Weil is right Peabody shares could increase 68% in next 12 months.

Some positive words for Peabody and coal via BusinessWeek.com yesterday by Matthew Philips:

Not everyone believes coal is finished. Analysts at FBR Capital Markets, a Virginia-based investment bank, think most coal-to-gas switching has already happened, and further switching will be much harder because of logistical constraints and existing contracts. “King Coal is not so easily displaced,” says FBR analyst Marc de Croisett. Overseas customers are materializing, too: U.S. coal exports rose 57 percent from 2009 through the end of 2011. New power generation in China and India could add 300 million tons of new coal demand this year.

MASTERY Bottom line:

Peabody Energy and its friends in the coal industry have had enough Hater-Aid poured on them in the past few months.

A star company like Peabody despite the negative outlook is going to start finding analyst support based on low expectations and a reduced share price.