NEW YORK (TheStreet) -- Peabody Energy (BTU) - Get Peabody Energy Corporation Report , the world's largest private-sector coal company, sees a light at the end of the coal tunnel but analysts and the latest economic data from China aren't as optimistic.
The St. Louis-based company released third-quarter results last week and coal sales volume and revenue dropped by 10% and 4% to 62.5 million tons and $1.72 billion, respectively. Worse, the company reported a loss from continuing operations of $154 million compared with income of $24 million in the same period last year.
Peabody, which produces thermal coal used for power generation as well as metallurgical coal used in making steel, has struggled with deteriorating prices. The demand for its commodity has been hit by low natural gas prices, increasing use of alternative energy sources and the global drive to reduce carbon emissions by cutting coal consumption.
In this tough business environment, Peabody Energy is "controlling what it can control, including lowering costs and reducing capital expenditures," said Goldman Sachs analyst Neil Mehta in recent research report emailed to TheStreet.
Peabody shares have dropped by 47% this year, currently at $10.35. This sounds awful but Peabody is actually one of the better performers compared with over-50% drops at competitors Arch Coal (ACI) - Get Albertsons Cos. Inc. Report , Alpha Natural Resources (ANR) and Walter Energy (WLT) .
Peabody continues to see signs of recovery with improvements in demand and supply fundamentals. The company said during a presentation in September the global demand for coal is expected to climb from 8.6 billion tons in 2013 to 9.3 billion tons in 2016 driven by higher consumption from China and India.
During the conference call last week, Gregory Boyce, Peabody's CEO, said India in particular was a "bright spot" as the country ramped up its coal imports. On the supply side, Boyce said metallurgical coal producers have cut down around 30 million tons of annualized production and 20 million tons of capacity will also get eliminated in the near term, easing some of the supply glut from the market.
But will this cause a significant increase in coal prices? Unless there's a substantial uptake in prices, it will be "challenging" for Peabody to change its fortunes, Goldman's Mehta wrote. According to the ratings agency Fitch, this is unlikely to happen anytime soon.
On Tuesday, Fitch downgraded Peabody's credit rating and reaffirmed its "negative outlook" saying that while coal prices appear to be bottoming, they are heading towards a "slow" recovery process. In an email to TheStreet, Fitch's spokesperson further elaborated that the coal market will continue to struggle with excess supply through at least 2015.
This isn't surprising since growth in China, the world's largest coal importer, remains a big concern. The country's coal consumption has dropped between 1% and 2% in the first nine months of 2014, even with a 4% increase in power consumption, official data show.
The future of coal in China isn't looking any better.Peabody's Boyce said the country, responsible for a quarter of coal's global trade, will continue to remain a dominant player. However, China seems to be moving away from this commodity. That is alarming for coal producers.
China has been clamping down on consumption of low-quality coal to tackle the severe pollution problem. The clampdown threatens around 38.6 million tons of coal imports. Also, coal companies like Peabody that rely on Chinese imports were hit with import duties starting Oct. 15, a measure to support China's coal industry and make foreign coal more expensive.
Peabody Energy did not respond to email and phone messages from TheStreet requesting comment by press time.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates PEABODY ENERGY CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate PEABODY ENERGY CORP (BTU) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."
You can view the full analysis from the report here: BTU Ratings Report