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Why Peabody Energy Stock Tumbled as Much as 16% Today

What happened

Shares of global coal giant Peabody Energy (NYSE: BTU) fell as much as 16% on Thursday, just one day after a new administration took over in Washington. By 11:30 a.m. EST, the stock had clawed back some of that decline, but was still lower by roughly 11%. No news from Peabody appears to have precipitated this decline, but the government handover is a very big deal that likely has investors reevaluating this coal miner's stock.

So what

The previous administration had been a staunch supporter of coal. The new administration is a staunch supporter of clean energy. Although coal is plentiful in the United States, it is also among the dirtiest ways to produce energy, which is one of two core markets for the carbon-based fuel (steelmaking is the other). It is highly unlikely that coal will get much support from Washington for the next four years, and the inauguration cemented that.

A coal mining machine at work. Image source: Getty Images.

In fact, it wasn't just Peabody that fell today, with peers like Alliance Resource Partners (NASDAQ: ARLP) and Arch Resources (NYSE: ARCH) also pulling back, just not quite as dramatically. One of the problems that Peabody is dealing with is a heavily leveraged balance sheet. To put a number on that, the company's debt-to-equity ratio is a hefty 5.8 times compared to 1.8 for Alliance Resource Partners and 0.6 for Arch.

In fact, Peabody has already been working with creditors in an attempt to ease its debt burden. Thus, the likely headwinds to come from a new administration that favors clean energy will probably be harder on Peabody than on its peers. And, as you would expect, investors are likely dumping the stock in anticipation of hard times ahead.

Now what

Coal remains an important source of energy globally, and that isn't going to change in the near term. But it is a commodity, and the shift toward cleaner energy sources like natural gas and renewable power has taken a huge toll on the industry. As the world continues to move away from coal, companies like Peabody will continue to experience financial stress. If you want to invest in the coal sector, financially stronger names would probably be a better bet.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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