Has Walter Energy Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Walter Energy (NYSE: WLT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Walter Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

16.8%

Pass

 

1-Year Revenue Growth > 12%

32.5%

Pass

Margins

Gross Margin > 35%

33.2%

Fail

 

Net Margin > 15%

8.4%

Fail

Balance Sheet

Debt to Equity < 50%

102.9%

Fail

 

Current Ratio > 1.3

1.55

Pass

Opportunities

Return on Equity > 15%

10.4%

Fail

Valuation

Normalized P/E < 20

11.52

Pass

Dividends

Current Yield > 2%

1.4%

Fail

 

5-Year Dividend Growth > 10%

22.7%

Pass

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Walter Energy last year, the company has seen its score drop by three points, as falling margins and returns on equity have hit the coal miner hard. The stock has also plunged, losing half its value over the past year.

The coal industry has been a terrible place to be in the past year, as low natural gas prices have taken away one of the biggest demand drivers on the thermal coal side of the business. Arch Coal (NYSE: ACI  ) , CONSOL Energy (NYSE: CNX  ) , and Alpha Natural Resources (NYSE: ANR  ) have had to reduce production and in some cases shut down mines due to weak demand, and although natural gas prices have recovered somewhat in recent months, it's unclear whether switching among electric utilities to gas-fired power plants will permanently cut demand.

But Walter hasn't faced the same pressure to dramatically cut its output that some other producers have. With a focus on metallurgical coal, Walter is much more reliant on strength in the global economy, and China's recent decision to spend $150 billion on infrastructure improvements bodes well for that key emerging market.

Still, slow activity in the steel industry hasn't done Walter any favors. Cliffs Natural Resources (NYSE: CLF  ) has seen both met-coal and iron ore demand fall off the proverbial cliff. Moreover, even once steel production rebounds, pent-up supply throughout the world could keep prices low for a while.

For Walter to improve, it needs conditions to improve enough to start working through any backlog of metallurgical coal and start forming a bottom in the market. Longer-term, the growth trends in emerging markets that have driven Walter in the past appear still to be in place.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Walter Energy has plenty of potential, but why not invest in the one company in the energy sector that can hold fast no matter what oil costs? Find out why this company is the one energy stock you must own before 2014 totally free in our premium research report. Click here to read more.

Click here to add Walter Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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