Walter to Underperform - Analyst Blog

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We retain our Underperform recommendation on coal major, Walter Energy Inc. ( WLT ). The company reported weak top- and bottom-line results in the third quarter 2012 with both lines trailing the Zacks Consensus Estimates.

We believe continued softness in the markets of Asia and Europe and dull prices will impact export revenue significantly. The company's production glut during the quarter led to an increase in coal stockpiles which added to tepid demand will prove unprofitable for the company.

Going forward, rigid environmental regulation like the Mercury and Air Toxics Standards ("MATS") will likely constrict the company's margin. The company's operations are also exposed to extreme weather conditions which can impact the financials.

However, Walter Energy's Canadian operations were successful in its cost containment efforts as both its Brule and Wolverine mines exceeded their cost reduction targets. We believe with the worldwide coal market stalemate, the company's continued cost control initiatives could somewhat ease the headwinds.

The Zacks Consensus Estimates for the fourth quarter and full year 2012 presently stand at a loss of 60 cents and earnings of 97 cents per share, respectively. The Zacks Consensus Estimates for the fourth quarter and full year 2012 thus imply a decline of 142.5% and 85.5%, respectively, from the year-ago reported figures.

Going forward, earnings decline could further aggravate with metallurgical coal exports facing the brunt of the global downturn in the steel market. Moreover, its recent offering of senior notes will elevate debt levels. This bearishness is reflected in the Zacks #5 Rank (Strong Sell rating) that the company retains.

Another coal player, CONSOL Energy Inc. ( CNX ) having a short-term Zacks #4 Rank is also expected to witness lower profitability due to the challenging coal market fundamentals. CONSOL's recent shutdown of Miller Creek Surface unit came as a huge blow to its business growth goals.

Based in Birmingham, Alabama, Walter Energy produces and exports metallurgical coal for the steel industry primarily in the United States. The company also produces thermal and industrial coal, anthracite, metallurgical coke, coal bed methane gas, and other related products. With market capitalization of $1.83 billion, the company has 4,200 total employees.



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 The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CNX , WLT

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