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Is Walter Energy a Buy?

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Walter Energy (NASDAQOTH: WLTGQ  ) has fallen 65% year to date. With the Chinese economy slowing, coal prices have stalled and coal companies have fallen out of favor. The industry is suffering from oversupply, and there is a worry among investors that some coal miners may go bankrupt. Should investors get in now, or wait until the smoke clears?

Macro headwinds
The Chinese economy, which accounted for 45% of the world's steel demand in 2012, is slowing. According to Caterpillar, demand for construction equipment in China has halved. Because of the headwinds, the benchmark coking coal price has subsequently fallen quarter-over-quarter from $172 to $145. As a result, most metallurgical coal companies are bleeding red.

Even though the World Steel Association predicts demand for steel will increase 2.9% in 2013 and 3.2% in 2014, the future of coal miners will not brighten until they get rid of their excess capacities by shutting some mines down. Walter Energy has taken significant steps to cut back on its operating costs including idling its Willow Creek mine, but cutting expenses will not make Walter Energy profitable until coal prices head higher.

Walter Energy's balance sheet looks tenuous after the acquisition of Western Coal Corp in 2010, a move that increased Walter's long term-debt from $154 million to $2.26 billion. Because of the acquisition, Walter Energy has a long-term debt-to-equity ratio of 2.74, one of the highest ratios in the industry. The company did make a deal with its creditors to suspend the interest coverage ratio covenant until March 31, 2015 in return for decreasing Walter's dividend to $0.01 per quarter and other concessions. This deal should give Walter Energy room to breathe for another two years.

Walter Energy currently trades around 13% below its book value of $15. Analysts are not expecting any profits for Walter Energy this year or next and have a consensus price target of $19.59.

The competition
Alpha Natural Resources (NASDAQOTH: ANRZQ  ) is a metallurgical coal producer. Like Walter Energy, the company is not expected to make any profit for the foreseeable future until coal prices go higher. While the company does not pay any dividends, Alpha Natural Resources has a stronger balance sheet than Walter Energy with a long-term debt-to-equity ratio of 0.71. The company also trades at a better price-to-book value than Walter, with shares trading at just 29% of book value versus Walter's 87%.

Peabody Energy (NASDAQOTH: BTUUQ  ) produces both bituminous and metallurgical coal. Peabody Energy's bituminous coal operations are under pressure from falling natural gas prices. This is the result of glut of natural gas while its metallurgical coal operations are losing money from the Chinese slowdown. Unlike Alpha Natural Resources or Walter Energy, however, analysts expect Peabody Energy to be profitable next year with an estimated profit of $0.64 per share. The company also pays a dividend of $0.34 for a yield of around 2% and has a stronger balance sheet than Walter with a long-term debt-to-equity ratio of 1.31.


If an investor had to buy coal shares now, however, Peabody Energy is the best bet. It is diversified enough to survive China's slowdown and is the only company expected to make a profit in the future. 

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Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2013, at 6:02 PM, marks4marks wrote:

    The best bet is often not the company that is the strongest per cash or even earnings.

    The best stock is usually the one with the lowest price that has no reason for not recovering in a given sector and is a value play. In this sector, that would be ACI followed by ANR and then BTU for those seeking 400%+ upside in PPS.

    JMO and only 33 years experience in the markets and not a Broker.

  • Report this Comment On January 25, 2015, at 1:23 PM, rsinj wrote:

    "JMO and only 33 years experience in the markets and not a Broker."

    And today ACI, ANR, and BTU are off 70% to 85% each from when you made that post. 400% upside today would get you back to breakeven on them. It's possible all three will find themselves in bankruptcy in the next 12 to 18 months.

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