Walter Digs Deep For High Growth

5/2/2011


  Recent Price
$134
  Dividend
$0.50
  Yield
0.4%
  P/E Ratio
16
  Shares (millions)
53
  Long-Term Debt as % of Capital
21%
  52-Week Price Range
$143.76 - $57.62

The global recovery runs in part on fuel pulled from coal mines in North America. Walter Energy ($134; WLT) operates several of these mines, which supply the global steel industry with metallurgical coal.

Coming off robust growth in 2010, Walter's March-quarter earnings per share roughly doubled to $1.66 excluding special items, $0.18 below the consensus. Higher-than-expected mining costs caused the shortfall. Sales rose 31% to $409 million. Given the highly uncertain nature of mining, shortfalls from companies like Walter are not unusual. The stock has traded sideways since the earnings were released on April 20, and consensus profit estimates for 2011 and 2012 have risen on expectations of strong coal pricing.

Walter is a cyclical stock, not the type to consistently grow earnings year after year. But the coal producer appears to have plenty of room to grow before reaching its ceiling. Walter Energy is a Buy.

Business breakdown

About 2,000 feet below Alabama's red-clay surface, pairs of rotating drums fitted with shears slice off blocks of metallurgical coal onto a chain conveyor that transports the coal to a shaft. From there it is hoisted to the surface. This mechanized process makes up the heart of Walter's underground-mining operation, a business that generated 81% of its 2010 revenue and 91% of operating income. Walter's coal reserves are projected to last 25 to 30 years.

The surface-mining segment (8%, 4%) sells most of its coal to electric utilities or for industrial purposes.

Walter's coke plant (11%, 5%) will likely operate at or near full capacity this year. Walter sells various forms of coke, a coal residue, for use in the automotive, agricultural equipment, and steel industries.

Several broad trends bode well for growth:

• Coal generates 41% of the world's electricity, and despite efforts to utilize cleaner energy forms, the World Coal Institute says that percentage could reach 44% by 2030.

• Global production of crude steel rose 15% to a record 1.4 billion metric tons last year. South America and Europe — key markets for Walter — grew faster than the global average.

• Flooding in Australia and labor and transportation problems elsewhere have triggered a surge in coal prices. About 90% of Walter's contract sales volume for the second half of 2011 is unpriced.

• Walter is entering new sales markets, including Japan, Korea, and China, via the recently completed purchase of Western Coal for $3.4 billion in cash and stock.

Conclusion

On April 20 management lowered its 2011 production target for its Alabama operations to 7.5 million to 8 million tons, implying growth of 4% to 11%. Production is ramping at Western Coal, expected to contribute an additional 4.9 million to 5.3 million tons from April to December. At nine times expected current-year earnings, Walter trades at a substantial discount to the coal group. An annual report for Walter Energy Inc. is available at 4211 W. Boy Scout Blvd., Tampa, FL 33607; (813) 871-4811; www.walterenergy.com.

 

WALTER ENERGY
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '11
1.66
vs.
0.79
+ 31%
139.96
-
111.33
19 - 15
Dec '10
1.75
vs.
0.63
+ 70%
131.25
-
78.79
21 - 13
Sep '10
2.57
vs.
0.44
+ 67%
84.89
-
57.62
21 - 14
Jun '10
2.16
vs.
0.21
+ 143%
99.45
-
60.31
48 - 29
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
1.59
7.25
0.48
131.25
-
57.62
18 - 8
2009
0.97
2.64
0.40
80.08
-
15.19
30 - 6
2008
1.47
6.74
0.30
111.99
-
11.12
17 - 2
2007
1.24
1.96
0.20
38.79
-
20.53
20 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
96
69
99
96
95
75

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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