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Is It Time to Get Fired Up About Walter Energy?

Sean Williams
July 9, 2012

Shares of Walter Energy (NYSE: WLT  ) hit a 52-week low on Friday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.

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 (NYSE: BHP  ) between it and labor unions appears to be near an end. The strike had reduced overall metallurgical coal output and buoyed prices, but those prices once again are in jeopardy with production inevitably coming back on line.

How it stacks up
Let's see how Walter Energy compares to its peers.

WLT Chart

WLT data by YCharts.

Despite hitting a new 52-week low, Walter's shareholders have little to complain about, as it's vastly outperformed CONSOL Energy (NYSE: CNX  ) and the struggling Arch Coal (NYSE: ACI  ) .



Price/Cash Flow

Forward P/E


Walter Energy





BHP Billiton










Arch Coal





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 operatio