We reaffirm our Neutral recommendation on Walter Energy Inc. (WLT). The premium metallurgical coal operator currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Although Walter Energy managed to increase its metallurgical coal sales volume in the first quarter of 2013, weak prices affected the company’s revenues. Effective cost management, however, helped the company to cut its quarterly loss to 64 cents per share from the year-earlier loss of 88 cents per share.
We expect Walter Energy’s efforts to keep a check on its operating costs to lead to margin expansion. The favorable prediction of a 2.9% and 3.2% rise in global steel demand in 2013 and 2014, respectively, by the World Steel Association will provide an impetus to Walter Energy’s metallurgical coal business in the future.
With increasing demand, Walter Energy would like to return its idle mines to operation as well as ramp up production levels at existing mines.
On the flip side, seaborne coal exporters from Australia will have an edge over Walter Energy because of their nearness to the Asian markets. Recently, Indonesia beat Australia as the world’s largest coal exporter. These countries owing to their locational advantages will pose stiff competition to Walter Energy.
Moreover, tighter environmental regulations will continue to pose hurdles for the company.
Other Stocks to Consider
We believe Walter Energy will need to tread cautiously given the sluggish economic pace in the coal-hungry Chinese and Indian economies.
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