However, Walter Energy, Inc. (NYSE:WLT) produces primarily high-quality metallurgical coal that is used in steelmaking. Is the market throwing the baby out with the bathwater?
Buried Treasure The company's numbers look terrible: negative earnings for 2013 with an analyst consensus of a loss of $1.43 a share; weak Chinese demand (although China is a large coal producer, they produce very little high-quality metallurgical coal); and coking coal prices down 18% to a recent price of around $140.
To give the market even less confidence, Walter Energy, Inc. (NYSE:WLT) recently postponed proposed refinancing of $1.6 billion in term loans, citing market conditions. Most investors wouldn't touch this idea with a 10-foot pole. But look beneath the surface.
Caption: This overland conveyer transports coal from Walter Energy's mining operations in Alabama.
Walter Energy, Inc. (NYSE:WLT) is in a fairly simple business: It owns and produces a tangible asset. Conservative estimates put Walter Energy, Inc. (NYSE:WLT)'s tangible book value at around $16 a share. Much of that is tied to the company's coal reserves (coal in the ground). That wasn't a big deal when shares were trading north of $100, but with shares staggering around $11.50, it's a different story -- that's 45% upside. The value is literally buried in the ground. But the story gets better.
As far as the metallurgical segment -- Walter's bread and butter -- goes, demand has stabilized, albeit at lower levels. According to the U.S. Energy Information Administration, coking coal domestic demand for 2013 should slip about 1.4% from last year, to 20.5 million tons. Not a disaster.
Imports are a different story. Last year, import demand stood at 125.7 million tons. This year's forecast is pretty grim at 107.1 million tons, a 14.8% drop. However, the 2014 forecast for coking coal imports appears stable at 108.4 million tons. A modest increase of just 1.2% leaves some room for an upside surprise.
As far as Walter Energy,Action to take -- Walter Energy is clearly undervalued, based on the company's improving internals and improving macro conditions, a 12-month price target of $16 would bring the company back to its book value. Shares currently trade around $11.50. This would represent a 40% return. The annual 50-cent-a-share dividend gives the stock a yield of about 4.4%. Don't count on it being that high forever, but this will help the company in the long run.
Stockplusmoney, what is your source? What about the date? This sounds dated, like before the Earnings Warning, before their ability to obtain more credit was called into question, and before the stock price got pummeled.