Walter Energy Leaves The Worst Behind And Embarks On The Road To Recovery

Nov.10.13 | About: Walter Energy, (WLT)

Walter Energy (NYSE:WLT), the leading U.S. met coal company, has recently struggled to post a healthy financial performance due to weak coal market conditions and liquidity concerns. However, I believe the worst is priced in and the stock has bottomed out. The company has been taking correct measures to survive the prevalent tough times for the coal industry and support its bottom line results. As coal market conditions improve in the future, it will portent well for the company's financial performance and the stock price.

Recently, the company reported its financial performance for 3Q2013. The reported financial results for the recent third quarter were below consensus estimates. The company reported an adjusted EPS of ($1.68), missing consensus estimates of ($1.01), as compared to $0.48 in the corresponding period last year. Reported EBITDA for the recent third quarter came out to be $21.3 million, below consensus estimates of $26 million. The company reported total revenues of $455 million for 3Q2013, down 25% as compared to 3Q2012.

WLT's financial performance for the recent third quarter was adversely affected by weak met coal prices, higher interest expense and an unfavorable income tax rate for the quarter. Met coal and PCI benchmark prices decreased by 16% and 18% quarter-on-quarter in 3Q2013. However, coal prices have started to show signs of a recovery as met coal benchmark price for the ongoing 4Q increased 5% to $152 per ton. Also, met coal demand seems to be strengthening as the sales volume for the quarter increased by approximately 7% to 2.8 mmst. I believe that as economic conditions in the Eurozone and other key regions improve, coal demand will further strengthen and have a positive impact on the coal industry. Also, better coal supply management to address concerns of oversupplied coal markets will portent well for the industry.

In the ongoing tough conditions for the industry, the company remains committed to improving upon its cost structure and capital spending to support struggling bottom line results and preserve cash. WLT continues to get bottom line support from its cost reducing measures. In the quarter, the company lowered its total cash cost of met coal by approximately 11% to $117.95 per ton. Also, the company successfully lowered its selling, general and administration expenses for the quarter by 32% year-on-year. Moreover, the company stays focused on reducing its met coal production costs by 15% year-on-year in the future. WLT has also been slashing its capital expenditure to preserve cash in the prevailing tough business conditions; WLT lowered its capital expenditure by 66% to $28.5 million in 3Q2013. The company remains on track to incur capital expenditure of $150 million for the full year 2013.

WLT has been making efforts to improve upon its financial flexibility to survive through the tough times. The company, during its recent earnings call, stated that it had made some progress in connection to the $250 million asset sales to boost liquidity and improve financial flexibility. However, the company has yet to provide an update on the potential asset sales. I believe asset sales remain an important stock price catalyst in the near term and WLT will sell some of its non-core assets within the next 6-8 months.

The company ended the recent third quarter with total available liquidity of $614 million, including $293 million of cash and equivalents, and $320 million of available under revolving credit facility. As the company has been undertaking initiative to reduce costs and capital expenditures, the company's liquidity position will improve in the future. Also, anticipated assets sale of $250 million will boost the company's liquidity position.

The company has been taking corrective measures to survive the tough business conditions. WLT's cost control and assets sale initiatives remain important near term stock price catalysts, which will have a positive impact on the stock price. Also, I believe coal prices have bottomed out and coal market conditions will improve in the future, as demand recovers and better coal supply management is observed. Current valuations also remain attractive for WLT, as the stock is trading at depressed price-to-sales of 0.59x and price-to-book value of 1.30x. Due to the aforementioned factors, I reiterate a long term buy rating on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.