How Did Walter Energy Dig Itself Such a Deep Hole This Year?

The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get passed by? First-half performances can hold some clues, so let's look to the recent past to find out whether Walter Energy (NYSE: WLT  ) deserves a place in your portfolio going forward.

First-half recap
Walter Energy's stock has not had a good year at all:

WLT Total Return Price Chart

WLT Total Return Price data by YCharts

Here are a few financial snapshots of its recent performance:

Indicator

Result

Market cap $2.33 billion
TTM revenue $2.78 billion
TTM net income $308 million
TTM free cash flow $116 million
MRQ revenue $632 million
MRQ net income $41 million
MRQ free cash flow ($50 million)
MRQ revenue / net income year-over-year change 54.5% / (50%)
P/E and forward P/E 8.0 / 4.8
Price to free cash flow 20.7
Motley Fool CAPS rating (out of 5) **** (Find out more )

Source: Morningstar. TTM = trailing-12-month. MRQ = most recent quarter.

What the numbers don't tell you
Walter Energy's reported earnings have been underwhelming this year. Its fourth quarter was a whiff on both the top and bottom lines. The first quarter wasn't much better, as an increase in revenue over the year-ago quarter matched with lower net income for the same period. The reasons for that weakness all boil down to a slump in Walter's core business of metallurgical coal.

Fool contributor Sean Williams highlighted the company's weaknesses when it hit a 52-week low earlier this month. Compared with Arch Coal (NYSE: ACI  ) and Consol Energy (NYSE: CNX  ) , Walter's doing better over longer timeframes -- but I doubt shareholders of any major metallurgical coal company are happy this year. Over the past year, the price of coal and the amount of coking coal exported have both fallen, which should help explain why those earnings reports were so disappointing:

WLT Total Return Price Chart

WLT Total Return Price data by YCharts

Steel producers are also having problems. Both ArcelorMittal (NYSE: MT  ) and United States Steel (NYSE: X  ) have fallen substantially over the past year, moving in near-perfect lockstep with the sinking price of steel:

^DSST Chart

^DSST data by YCharts

Mittal's net income, often well over $1 billion quarterly, has been in the dumps, barely managing to break even in its most recent quarter. The company's annual earnings have yet to come close to matching pre-recession highs. Even Chinese steelmakers, once buoyed by high construction demand, are cutting production as weakening construction output becomes a reality.

The coal industry recently witnessed a bankruptcy in its ranks, as Patriot Coal went under last week. Walter Energy is in a much better position, as analysts still anticipate strong earnings next year. As long as Walter can keep paying its debt -- which may become a bit hairy if major slowdowns occur, as the company has $2.3 billion in long-term debt against just $138 million in cash on hand -- it ought to survive to see a much stronger year in 2013. Coal-fired power plants may be on their way out, but that doesn't mean metallurgical coal will be eliminated too.

Coal was the king of the first Industrial Revolution, but it's time for a new revolution. Which companies will lead the way? The Motley Fool's found three top stocks that are changing the way we make things. Find out everything you need to know about these great investment opportunities in our most popular free report on why "The Future Is Made in America."

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.

The Motley Fool owns shares of Arcelor Mittal. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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