We downgrade our recommendation on
Walter Energy Inc.
) 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
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
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.
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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