Walter Energy to Underperform - Analyst Blog

By Zacks Equity Research,

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We downgrade our recommendation on Walter Energy Inc. ( WLT ) to Underperform from Neutral. Although Walter managed to generate healthy financial results in the second quarter, we believe spiraling costs in the U.K. and Canadian operations will continue to drag down the company's profitability in the forthcoming quarters.

Though Walter's thermal coal operations are small-scale, we expect the current downward trend in the US coal prices to take a toll on the company's top-line. In addition, Walter's narrowing of its 2012 capex guidance to $400 million from $500 million could send a bad signal to investors, which would certainly affect its stock performance in the near term.

Going forward, the obligation to fulfill environmental regulations is expected to limit Walter's cost-cutting program. We believe recurring risks including transportation capacity constraints and weather variations could expose the company to severe operational losses.

With coal being an exhaustive resource, the company's failure to acquire and develop reserves could also affect its profitability. In addition, a rise in prices of steel scrap, petroleum and equipment could lead to operational austerities.

However, the major crux of Walter's operations is production and export of metallurgical coal. With growing demand for met coal from India, China and South Korea, we anticipate the company to witness strengthening margins.

We believe the company's commitment to maintaining a healthy balance sheet and flexible liquidity portfolio will enable Walter to favorably execute its growth related projects.

Walter retained its total coal production guidance for 2012 in the band of 11.5-13 million metric tons (MMTs). Of total production, 75% to 80% will constitute of the Hard Coking coal (HCC) variant and the balance will be the low-vol Pulverized Coal Injection (PCI) coal.

The Zacks Consensus Estimates for the third quarter and full year 2012 currently stand at $1.03 per share and $2.83 per share, respectively. Walter's closest competitor in the US market is Consol Energy Inc. ( CNX ).

The company currently holds a Zacks #3 Rank which translates into a short-term Hold rating. Based in Tampa, Florida, Walter Energy Inc. is one of the leading U.S. producers and exporters of premium metallurgical coal to the global steel industry.

The company also has a steam/industrial coal mining business, although much smaller in size than its metallurgical operations. It also produces metallurgical coke and coal bed methane gas.

CONSOL ENERGY (CNX): Free Stock Analysis Report
WALTER ENERGY (WLT): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: CNX , HCC , WLT

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