It's been a rough 52 weeks for Walter Energy (WLT) as the coal industry has faced numerous headwinds. The big catalyst for the drop in coal stocks has been the falling market price. WLT went into the issue in depth in its Q1 release. The company noted that the average first-quarter 2012 selling price of hard coking coal (HCC) was $226 per metric ton (MT), slightly above the $220 per MT price estimated in the company's first-quarter outlook. However, the HCC selling price was 7% lower than the $244 per MT achieved last quarter, reflecting world market trends. The average first-quarter selling price for pulverized coal injection was $188 per MT, again above the estimate of $180 per MT in the first-quarter outlook, but 11% lower than the $212 per MT achieved in the fourth quarter of 2011, reflecting world market trends.
However, it is unlikely that the use of coal is going anywhere, especially the high grade met coal WLT focuses on. As steel production picks up with the economy, demand for met coal will pick up as well. The valuation metrics suggest that the stock is a good buy with all the metrics saying that the stock is undervalued. Below is an in depth look at the valuation metrics and stock chart.
Valuation: Walter Energy's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. Walter Energy's current P/B ratio is 1.5 and it has averaged 11.1 over the past 5 years with a high of 34.6 and low of 1.5. Walter Energy's current P/S ratio is 1.2 and it has averaged 2.9 over the past 5 years with a high of 7.9 and low of 0.8. Walter Energy's current P/E ratio is 10.3 and it has averaged 17.8 over the past 5 years with a high of 49.9 and low of 2.8.
Price Target: The consensus price target for the analysts who follow Walter Energy is $81. That is upside of 61% from today's stock price of $50.25 and suggests that the stock is undervalued at these levels. This also suggests that the stock has significant upside and is an attractive opportunity at these levels.
Forward Valuation: Walter Energy is currently trading at about $50 a share with analysts expecting EPS of $6.84 next year, an earnings increase of 60% y/y, for a forward P/E ratio of 7.3. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. CONSOL Energy (CNX) is currently trading at about $30 a share with analysts expecting EPS of $2.4 next year, an earnings increase of 35% y/y, for a forward P/E ratio of 12.3. Peabody Energy (BTU) is currently trading at about $24 a share with analysts expecting EPS of $3.6 next year, an earnings increase of 35% y/y, for a forward P/E ratio of 6.6. The mean forward P/E of Walter Energy's competitors is 9.5 which suggests that Walter Energy is undervalued relative to its publicly traded competitors.
Earnings Estimates: Walter Energy has beat EPS estimates 1 times in the past 4 quarters. The company's EPS figures have come in between -162 cents and 16 cents from consensus estimates or about -40.7% to 14.4% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.
Price Action: Walter Energy is down 58.0% over the past year, underperforming the S&P 500, which is up 2.2%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $60.95 and below its 200 day moving average, which sits at $67.34.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.