BTU, buying at a trough valuation

I have always had an interest in mining companies.  I am not sure why but the idea that a certain place on earth has a concentration of a valuable asset (gold, copper, diamonds, oil, coal, etc) has always interested me.  I guess part of it is the history and how those minerals have formed over billions of years. 

Recently, I decided to take a look at Peabody Energy (BTU) as the company is trading significantly off its highs.  I believe that BTU is the premier name in the coal industry with the best management and a low cost producer.  If I want to buy an industry that is doing poorly across the board, I want to (eventually) buy the company that has the best management. 

In the past few years I have been short MEE (now part of ANR) as well as ANR.  I only wish I had held my shorts longer as I made only a small modest profit. 

Fortunately, I had not been following any of the coal stocks closely, as I would have been interested in buying at higher levels.  As you can see from the BTU chart (or any other coal name) 2011 and 2012 have been disastrous for any long term holder.  I suspect we are close to the bottom, however I do not see any catalysts (other then extreme value) to stop the slide. 

Before we jump right into a trade, I need to confirm that BTU is in fact, cheap.  Up until now, my gut just tells me it is cheap.  First thing I do is look at a financial aggregator like morningstar

http://financials.morningstar.com/ratios/r.html?t=BTU&region=USA&culture=en-us

After reviewing the data on morningstar, I want to investigate BTU further by reading the most recent 10-K.  Using morningstar saves a lot of time, as many companies do not warrant further research.  Only if a stock looks interesting do I investigate further.  I wish that all of the information is/was accurate but unfortunately aggregators of financial information are computerized and sometimes put the information in the wrong buckets.  I did previously build out BTU financials in 2010, so it was not too much work to update it. 

https://docs.google.com/spreadsheet/ccc?key=0At1Wluk5zm-ZdGpKeS1tNjFLdXUtMmUtWVA1M2cydHc

The first thing I notice is that book value is increasing each year.  I like to see that, as I know management is buying and selling assets on a yearly basis.  I would be concerned if we saw material write downs multiple times.  Also, the price to book is cheaper now than at any time in the past 10 years.  If management did need to write down the acquisition of MacArthur coal (closed Oct 2011), the book value is multiples below previous years.  There is a huge margin of safety with those numbers.

The next thing I want to look at are the financial ratios.  I notice that the company is still quite profitable and looking at earnings estimates on Yahoo Finance (here) we see the lowest estimate out there is above $2.00.  When I look at other industry names like ACI, ANR, JRCC, etc we see that some estimates are negative. 

The only negative that I see is FCF is negative in some years.  This can easily be explained by large acquisitions and can be adjusted. Using EPS or EBITDA shows that BTU is trading at its lowest valuation since the market crash of 2008.  In closing, it looks as though BTU is cheap on multiple metrics, if not on all metrics. 

Normally I would leave it to the reader to decide how he/she would make a trade.  In this instance becaues we are trying to pick a bottom I am going to show you my strategy.  I believe that unless you are lucky, it is impossible to pick a bottom.  What I try to do is to buy an initial stake and then have predefined spots where I am willing to add.  If I had bought BTU at the end of 2011 vs now, this type of trade would have saved me quite a bit of money.

Sell BTU April 29 put for $1.27 per share
Sell BTU May 28 put for $1.50 per share
Sell BTU June 25 put for $0.88 per share

These options are cash covered.  I have the cash to buy the stocks and hold the position if these options expire in the money.  Why setup the trade this way?  First, I am diversifying my timing by selling options in 3 different months, in case BTU has not reached bottom.  Second, I am giving myself a chance to make a nice return in case BTU is flat or slightly down.  Even if BTU stops going down, I would be surprised if it goes up dramatically in the short term.  The 25 put, even though it does not seem that far away, is actually over 10% away.  Perhaps June comes and 2 of the options expire worthless, I can either sell new puts, buy additional stock, or even use that premium received to buy some cheap calls if I see a catalyst.