Peabody Energy (BTU)

Commodity cycles make coal prices largely out of Peabody's hands; even costs are difficult to control, due to the commoditized nature of Peabody's inputs. Thus, there is a degree of luck to how the company's profit margins swing.

The slumping steel industry and falling electricity demand limit the number of contracts that Peabody Energy can secure for 2010. Though BTU has significant exposure to the rapidly expanding Asian coal markets, the coal-mining sector will struggle under constrained volumes for the rest of 2009 and may not rebound until 2010. Many analysts expect BTU to report weak second-quarter earnings. The reasons include soft prices for natural gas — which also fires power plants — and lower electrical demand because of the weak economy and cooler summer weather in many parts of the United States.

Recently, Peabody has not been very profitable; in a time where prices are high due to undercapacity, Peabody should be very profitable, so its less than stellar success may be an indicator that its performance during industry downturns could be alarming.

Government environmental regulations, if continued, could put a cap on the amount of coal possible for Peabody to sell, as well as create conditions for higher-cost coal production and lower profit margins.