Stifel: Peabody Energy Has A 'Stretched Balance Sheet And Lack Of Free Cash Flow'

Stifel downgraded Peabody Energy Corporation (NYSE: BTU) from Buy to Hold and set a $6 price target.

Analysts led by Christopher LaFemina felt that a "lack of investment in new seaborne coal capacity and recently announced production cuts" from Glencore PLC (LON: GLEN) "should limit the downside risk to seaborne coal prices."

LaFemina indicated that Peabody should also benefit from a better Australian dollar, however, "the U.S. coal market is still too challenging to justify buying BTU shares."

Looking ahead, LaFemina thought that a lack of investment in the industry was a reason "to be optimistic that the bear market may be near a bottom."

The firm forecasted a "gradual recovery in seaborne thermal coal prices (from $63 per tonne now to $75 per tonne long term) and met coal prices (from an estimated $113 per tonne for 2Q contracts (spot is $102 now) to $115 per tonne over the next three years)."

The analysts also expected U.S. thermal coal prices to "cyclically recover on the back of higher natural gas prices over time," but did not see an imminent recovery. Glencore, however, was assumed to be the largest beneficiary of higher seaborne thermal coal prices.

Peabody was also expected to benefit from higher seaborne coal prices, however, the company was seen as more dependent on a U.S. market recovery and that with a "stretched balance sheet and lack of free cash flow," it was decided to downgrade the stock.

Peabody Energy recently traded at $6.07, down 4.33 percent.