Shares of Walter Energy
How it got here
One word can quickly summarize why Walter Energy is down in the dumps: coal.
Coal prices are weak across the board, from energy generation to metallurgical coking coal that is used to strengthen steel, and it's having a ripple effect throughout the country. Railroads are transporting less coal and electric utilities can't move quickly enough to retire coal-powered electric plants and convert them to run on cheap natural gas or other renewable fuels.
Walter's problems originate on the coking coal side of the business, where roughly 80% of its business is devoted to the steel-strengthening component. With its purchase of Western Coal last year, Walter broadened its international reach into Europe -- a move likely to have shareholders banging their heads against the wall in disgust at the moment. Long-term coking coal prices should recover, but near-term prices are in free-fall while operating expenses are rapidly rising – not a good combination.
Also dragging Walter down was news Friday that not only had Standard & Poor's downgraded its outlook to negative from stable, but a strike at BHP Billiton
How it stacks up
Let's see how Walter Energy compares to its peers.
Despite hitting a new 52-week low, Walter's shareholders have little to complain about, as it's vastly outperformed CONSOL Energy
Company |
Price/Book |
Price/Cash Flow |
Forward P/E |
Debt/Equity |
---|---|---|---|---|
Walter Energy |
1.1 |
4.0 |
5.1 |
109.8% |
BHP Billiton |
2.7 |
5.7 |
13.8 |
38.8% |
CONSOL Energy |
1.9 |
5.4 |
11.3 |
84.7% |
Arch Coal |
0.4 |
2.3 |
39.8 |
113.6% |
Sources: Morningstar and Yahoo! Finance.
The first thing you'll notice is that metallurgical coal producers are pretty cheap based on these metrics, but we have to also consider that earnings estimates have been falling rapidly. Arch Coal was valued at a single-digit forward P/E just a few months ago -- now it may not even remain profitable in 2013. CONSOL is now trading below two times book value, but it has turned to closing mines and reducing total work days to five in order to cut costs and control production. BHP Billiton gets a pass here, as its mineral mining operations are so diversified it can weather the downturn in metallurgical coal demand.
Debt is another key factor that investors are keeping an eye on. Patriot Coal
What's next
Now for the $64,000 question: What's next for Walter Energy? The answer largely depends on how rapidly demand for steel improves in international markets and if Walter can weather the downturn given its hefty $2.3 billion in debt.
Our very own CAPS community gives the company a four-star rating (out of five), with a whopping 94.9% of members expecting it to outperform. I've yet to personally make a CAPScall on Walter Energy and I'm not quite ready to do so now, either.
Walter has a lot going for it in terms of growing its international presence and staying profitable thus far in a very weak coal environment. However, I can't overlook the great likelihood that Walter's earnings estimates are going to continue to fall as EU countries cut back on spending as austerity packages are enforced. The long-term demand for metallurgical coal should remain strong and pricing power will eventually return, but in the meantime, I'm going to keep my distance.
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