New Plays, Sunday, 10/22/2006
Most Recent Plays
by OI Staff
HAVING TROUBLE PRINTING?
BTU - Peabody Energy
One energy opportunity I am going to discuss today is coal and specifically
Peabody Energy. We have played it several times in the past but falling gas
prices killed the coal sector beginning in May. That sector is beginning to
rebound based in part on rising gas prices and the advent of winter. Coal demand
is about to rise dramatically.
TXU Corp, a major Texas utility, has proposed
a $10 billion plan to build 11 new
coal fired plants. They claim by using current technology and repeating the
designs at each location they can build them faster and cheaper than anyone
else. TXU is not alone. There are 154 new coal fired plants currently on the
drawing boards across the U.S. according to the National Energy Technology
Laboratory. Illinois is the only other state with 10 plants are in the planning
stages leaving 133 spread out across the country.
gas prices and a very bearish outlook on future gas prices is driving
utility companies back to coal even with all its emission problems. Gas
production in the U.S. has peaked and Canadian production, our current gap
filler, has also peaked and is already in decline. This projects a grim picture
for cheap gas prices with $15 gas almost a sure thing over the next couple
Coal we have in abundance with enough reserves to last 200-250 years at the
present rate of
consumption. Even doubling or tripling the consumption leaves us
many decades of cheap power. A coal-fired plant requires up to 5 years of
lead-time due to the extensive permitting process. Many are already under
construction and experts claim even more will be added to those 154 already
Some proponents have suggested going the coal gasification route, turning coal
into gas and removing the pollutants before it is burned, as a better way around
problem. Building a gasification plant is +20% to +25% more
expensive than a regular pulverized coal generation plant. American Electric
Power, Xcel Energy and Duke Energy are already reviewing plans to implement this
However those 154+ plants are built it will translate into significant new
demands for coal. Several coal to liquids plants are also in the works to
convert coal to fuel that can be burned as gasoline or diesel. One money plant
run by Satoil
(STO) in Africa converts 120,000 tons of coal per day into 160,000
bbls of liquid fuel. There are various price points for this technology
depending on the process and the scale but the average seems to be around $40
per bbl as breakeven. Since I doubt we will see those prices ever again these
plants should begin to proliferate thus adding to the demand for coal.
Peabody reported earnings on Thursday of 53 cents per share, up from 42 cents in
the year ago period. Analysts
were expecting a 44 cents profit. Sales were up on
higher volumes and on rising prices in all of the company's producing regions.
Peabody said prices rose on average +6% in the US and +7% in Australia. BTU
spiked from $40.85 to $44 on the news and I thought we had missed the boat.
Fortunately Arch Coal warned on Friday that transportation problems would force
it to lower production in 2007. Getting coal to buyers is a major problem and
even more a problem for the smaller producers.
This is why railroads like our
current play CSX are doing so well. They do not currently have enough capacity
to ship all the coal needed and are adding cars and track as quickly as
possible. With 154 new plants in the works this will only become more of a
profit center for the railroads and more of a problem for the smaller producers.
Peabody, as the biggest in North America can contract for more capacity and can
afford to pay more than the rest. The railroads want BTU for a customer
size does matter in the shipping business. Peabody still faces transportation
constraints and said it was slowing growth plans for its Powder River Basin
production by -7 million tons in 2007. They will still produce record volumes
but the rail capacity will not be up to full speed until late 2007 or early
2008. Peabody also said it was deferring the startup of its planned School Creek
mine to 2009 or beyond. Analysts liked this news saying the planned additional
tons of production could drive prices lower. By waiting until later
to bring this production online it would force power plants to stock up on coal
in fear of a shortage of supply.
The Peabody President said the country was finally working its way out of the
effects of the mild winter and they anticipate a tighter supply-demand picture
going forward assuming weather patterns return to normal. He said coal
stockpiles at U.S. power plants had fallen by -10 million tons
Peabody also said its growth will be accelerated by the $1.5 billion purchase of
Australia's Excel Coal Ltd. The purchase will triple Peabody production in
Australia from 9 million tons per year to 29 million. This coal is delivered to
the fast growing Asian markets. Peabody purchased more than 500 million tons and
three working mines from Excel. Much of this coal has already been committed
under long-term contracts to Asia.
Based on the
current trend, the number of new plants under construction and 150+
on the drawing board the future looks bright for Peabody. I believe this is a
company we should be invested in for the foreseeable future.
Buy Jan-2009 $50 LEAP Call ZZT-AJ currently $8.70
No insurance put at this time with $35.
The earnings cycle should always give us an opportunity to step outside of
the energy sector and pickup a couple bargains when they appear. Earnings
surprises sometimes take on a life of their own and the magnitude of the
reaction can be completely off the scale. Today we have a couple of entries that
fit that scenario.
CAT - Caterpillar
The first play outside the energy sector this week is CAT. Caterpillar was
for a -$10 loss on Friday after warning that sales could slow in 2007
if the economy continues to soften. They also said they were hit by slowing
sales in the housing sector and by a buildup of inventory at customer locations
in the diesel engine business ahead of the new rules for low emission diesel.
CAT said its business was still booming especially the overseas segments. CAT
posted earnings of +$1.14 for Q3, up from 94 cents, when the street was
expecting profits of
$1.35. CAT only lowered its full year outlook for profits
of $5.05 to $5.30 from prior estimates of $5.25 to $5.50. Profit growth is still
expected to be in excess of +10%. These are still stellar profits investors fled
CAT said if the economy does slow they expect sales of their expensive yellow
metal to slow with it. The risk comes from dealers who may be less inclined to
carry a lot of expensive inventory if sales are slowing. CAT said they only
2007 to be a slower growth phase for the current cycle and not the
start of an extended downturn. CAT said if the Fed cut rates early in 2007 they
could beat their current forecasts but they denied they were being purposefully
negative in their outlook to drive down expectations. They claimed instead they
were just being prudent. CAT said oil exploration, mining, infrastructure
development were areas of strength around the globe.
I believe CAT was being purposefully gloomy.
They have been punished before for
small misses and they took the "economic slowdown" opportunity as a way to lower
expectations just in case.
I believe CAT is a buy here as long as you have a long-term view. At Friday's
close of $59 there is about $2 of risk and plenty of upside. The $59 low is
about two days away from being the low from the year with a high of $82. If the
economy does succeed in achieving a soft landing I believe CAT will be well
With earnings already behind us there is little risk of another surprise.
BUY JAN-2009 $70 LEAP Call VKT-AN currently $7.20
No insurance due to strong support at $57.
TEX - Terex Corp
Terex is a diversified global manufacturer of construction,
mining equipment, shipping, transportation and refining industries. The Company
operates in five business segments: Terex Construction, Terex Cranes, Terex
Aerial Work Platforms, Terex Materials Processing & Mining, and Terex Road
Building and Utility Products. Earnings in the June quarter jumped +94% to $198
million. Revenues came from improved performance from the Terex Cranes, Terex
Aerial Work Platforms and Terex Materials Processing & Mining segments due
TEX has been growing by leaps and bounds with several acquisitions and greater
acceptance of its cranes and aerial work platforms. Demand is currently stronger
than TEX can supply with construction booming around the globe especially in
The analyst community can't say enough good things about Terex and they seem to
touch all the booming construction areas. With a market value of roughly $5
billion and sales of nearly $8 billion and
a PE of only 12 it is tough not to
take this company seriously even though it is only about 1/5th the size of
Their biggest customer is United Rentals, which buys their cranes, lift booms,
and various other products. Profits are expected to rise by +10% annually over
the next five years. Sales last quarter increased +18% profits +66%. In July
they targeted sales growth for the full year at +17% to +22% and raised their
earnings targets to $3.55 to $3.75 per
share from $3.20 to $3.40. Return on
invested capital is near +30%. Those are my kind of earnings increases.
In April Terex bought 50% of a crane maker in China in an effort to reduce costs
for its future products. TEX spiked last week on news that Oshkosh Truck was
acquiring JLG Industries for $3 billion. Citigroup said that although the deal
had nothing to do with Terex it bode well for the industry that Oshkosh was
willing to pay that kind of money at this time in the
economic cycle for aerial
assets. Terex Genie business is JLG's main competitor and the two dominate the
market. Genie accounts for 50% of Terex earnings.
After more than doubling in price last year TEX has spent six months
consolidating between $40 and $50 after a 2:1 split. TEX broke out over $50 a
week ago but the Caterpillar warning knocked it back to earth after a promising
The key here is that TEX has nothing to do with the Caterpillar story.
It has no
exposure to housing and business is booming. It was simply caught in the CAT
downdraft and that gives us an opportunity to enter the position cheap.
BUY Jan-2009 $60 LEAP VXQ-AL currently $10.90
Buy Jan-$45 PUT TEX-MI only is TEX trades at $48.