Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Alpha Natural Resources, Inc. (ANR), Peabody Energy Corporation (BTU): Is Walter Energy, Inc. (WLT) a Buy?

Walter Energy, Inc. (NYSE:WLT) has fallen 65% year to date. With the Chinese economy slowing, coal prices have stalled and coal companies have fallen out of favor. The industry is suffering from oversupply, and there is a worry among investors that some coal miners may go bankrupt. Should investors get in now, or wait until the smoke clears?

Walter Energy, Inc. (NYSE:WLT)

Macro headwinds
The Chinese economy, which accounted for 45% of the world’s steel demand in 2012, is slowing. According to Caterpillar, demand for construction equipment in China has halved. Because of the headwinds, the benchmark coking coal price has subsequently fallen quarter-over-quarter from $172 to $145. As a result, most metallurgical coal companies are bleeding red.

Even though the World Steel Association predicts demand for steel will increase 2.9% in 2013 and 3.2% in 2014, the future of coal miners will not brighten until they get rid of their excess capacities by shutting some mines down. Walter Energy, Inc. (NYSE:WLT) has taken significant steps to cut back on its operating costs including idling its Willow Creek mine, but cutting expenses will not make Walter Energy, Inc. (NYSE:WLT) profitable until coal prices head higher.

Walter Energy, Inc. (NYSE:WLT)’s balance sheet looks tenuous after the acquisition of Western Coal Corp in 2010, a move that increased Walter Energy, Inc. (NYSE:WLT)’s long term-debt from $154 million to $2.26 billion. Because of the acquisition, Walter Energy, Inc. (NYSE:WLT) has a long-term debt-to-equity ratio of 2.74, one of the highest ratios in the industry. The company did make a deal with its creditors to suspend the interest coverage ratio covenant until March 31, 2015 in return for decreasing Walter’s dividend to $0.01 per quarter and other concessions. This deal should give Walter Energy room to breathe for another two years.

Walter Energy currently trades around 13% below its book value of $15. Analysts are not expecting any profits for Walter Energy this year or next and have a consensus price target of $19.59.

The competition

Alpha Natural Resources, Inc. (NYSE:ANR) is a metallurgical coal producer. Like Walter Energy, the company is not expected to make any profit for the foreseeable future until coal prices go higher. While the company does not pay any dividends, Alpha Natural Resources, Inc. (NYSE:ANR) has a stronger balance sheet than Walter Energy with a long-term debt-to-equity ratio of 0.71. The company also trades at a better price-to-book value than Walter, with shares trading at just 29% of book value versus Walter’s 87%.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.