We retain our Underperform recommendation on coal major,
Walter Energy Inc.
). The company reported weak top- and bottom-line results in the
third quarter 2012 with both lines trailing the Zacks Consensus
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
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
Another coal player,
CONSOL Energy Inc.
) 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
WALTER ENERGY (WLT): Free Stock Analysis
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