We came across a bullish thesis on Peabody Energy Corporation (BTU) on Undervalued and undercovered’s Substack by Hugo Navarro. In this article, we will summarize the bulls’ thesis on BTU. Peabody Energy Corporation (BTU)'s share was trading at $18.82 as of Jan 13^th. BTU’s trailing P/E was 4.97 according to Yahoo Finance.

A large coal mine, with workers and tools in the foreground, the machines and coal piles in the background.

Peabody Energy (BTU) presents an intriguing investment opportunity amidst the current volatility in the coal market. The company recently made a bold move by acquiring additional coal assets, a decision that diverged from market expectations. Initially met with skepticism, this acquisition positions Peabody to become the world's leading seaborne coal producer, with a price tag of $3.8 billion. The deal, completed at an EV-to-EBITDA ratio of around 3.1, appears attractive, particularly given the potential synergies and the low entry cost relative to future coal price fluctuations.

This acquisition could serve as a leveraged bet on metallurgical coal prices, which remain depressed at current levels. With Peabody’s high per-ton costs, the company’s profitability is highly sensitive to shifts in coal prices. Should metallurgical coal prices rise, Peabody stands to gain substantially, making this a compelling speculative investment. While Peabody’s stock remains somewhat speculative, the strategic acquisition could deliver outsized returns if the coal market rebounds, particularly as global supply remains constrained due to stalled investments in new projects.

Given the tightening supply in the coal market, driven by smaller miners struggling at current price levels and limited large-scale investments in new projects, Peabody’s acquisition positions it to capture market share in an environment where supply is expected to decrease. Additionally, with global demand from countries like India and China set to rise, the company could benefit from a recovery in coal prices, especially if the Chinese economy rebounds or trade tensions with Russia intensify. For investors willing to accept higher risk, Peabody offers substantial upside potential in the event of a coal price resurgence.

Peabody Energy Corporation (BTU) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held BTU at the end of the third quarter which was 28 in the previous quarter. While we acknowledge the risk and potential of BTU as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BTU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.