Is Walter Energy, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Walter Energy, (WLTGQ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Walter Energy's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Walter Energy's key statistics:

WLT Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q1 2011.

WLT Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q1 2011.

How we got here and where we're going
Things have worsened for Walter Energy since we looked it last year, as this coal miner scored only one out of nine possible passing grades in its second assessment, down from an already-low three-of-nine score from 2013. Walter's only passing grade was awarded more on a technicality than a genuine improvement -- the collapse in Walter's net income outpaced the decay of its free cash flow during our three-year tracking period, but neither metric looks particularly healthy these days. Moreover, the company's revenue growth (and really, all of its financial metrics) has been negatively affected by declining global demand for coal. How might Walter be able to improve its position over the next few quarters? Let's dig a little deeper to find out.

Earlier this month, Walter Energy's first-quarter earnings disappointed on both top and bottom lines, as a decrease in average metallurgical (met) coal selling prices and declining met coal sales volumes continue to hammer the company as it attempts to tighten its belt. According to Bloomberg, the company could face difficulty borrowing funds under its existing credit facilities because of non-compliance, which will be a major problem for the debt-laden company, as refinancing at lower interest rates is one of its easiest options for cutting costs. With $400 million in cash, but with $2.9 billion in long-term debt on its balance sheet, Walter could fall into serious troubles if the met coal market shows no sign of improvement this year.

Walter Energy has been trying to improve the financial performance by shuttering operations, selling assets and refinancing debt obligations. The company recently sold its Blue Creek coal terminal in Alabama for approximately $25 million, and will also suspend production at its Canadian mines amid persistent weakness in the met coal market. My fellow Fool Reuben Brewer notes that the company also recently offered $200 million in 9.5% bonds and $350 million worth of bonds with interest rates between 10% and 11% to delay debt maturities until 2018. Walter also issued 3.15 million shares of common stock in exchange for senior notes due in 2020, which could result in a gain of approximately $12.0 million during the second quarter.

According to the U.S. Energy Information Administration, coal is expected to account for roughly a third of the global energy-generation market over the next 20 years, but that doesn't cover met coal, which is primarily used in steelmaking or other metallurgical industries (as its name should indicate). Foreign coal miners Vale SA and Glencore Xstrata have already decided to scale back met coal production in the United States, which should help halt the slide in coking coal prices and restore some balance between supply and demand. Walter itself will cut capital expenditures to $130 million and will reduce met coal production to a range of nine million to ten million tons for the current fiscal year. My fellow writer Jay Yao notes that major met-coal miners have already committed to cut global met coal production by over 10 million cumulative tons this year.

Putting the pieces together
Today, Walter has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.