Ryan Perlowin

Long/short equity, growth, tech, ecommerce
Ryan Perlowin
Long/short equity, growth, tech, eCommerce
Contributor since: 2013
Investors in shares of Westmoreland Coal Company (NASDAQ:WLB) have been handsomely rewarded over the past 15 months. In April, 2013 when this article was published, the stock traded at $11.50; an investment then would have yielded a 275% return. It’s important to understand why the shares have risen so dramatically and answer the question of whether or not there’s more room to run.
My original thesis was that appreciation in share price would be driven by the company’s unique “mine-to-mouth” niche. The call proved correct – WLB’s differentiation has created significant financial return, especially impressive given the dramatic losses suffered by the company’s competitors. Of the seven companies listed in the S&P Credit Rating chart above, only one has had positive returns in the past 15 months. Shares of CONSOL Energy (NYSE:CNX) are up 19%; Peabody (NYSE:BTU) -21%, Walter Energy (NYSE:WLT) -67%, Arch Coal (NYSE:ACI) -38%, Alpha Natural Resources (NYSE:ANR) -53%, and Cloud Peak Energy (NYSE:CLD) -20%. James River Coal Company (JRCC) filed for Chapter 11 bankruptcy in April of 2014.
WLB’s competitive advantage has come in two forms – lower relative transportation costs (which in turn yield a more competitive pricing strategy) and limited international exposure. The foresight on the part of company exec’s to carve their niche before diminishing international demand and increased transportation costs took hold was a risky move. It has proved prescient.
The successes at WLB over the past 15 months have laid the groundwork (quite literally) for expansion. The most significant deal came in December of 2013 when WLB acquired Sherritt International Corporation’s Prairie and Mountain coal mining operations for $282.8 million and an assumption of $330 million in liabilities. To finance the deal, the company closed a debt offering of $425 million in 10.75% senior notes due 2018, bringing their total long-term debt obligation to nearly $700 million.
Expansion has come at a cost. While WLB looks poised to perpetuate its relative strength in the coal industry over the short-term, the $700 million in long-term debt will weigh over the company’s head until the operations at US mines and the Canadian acquisition start generating enough cash to sustain confidence. Additionally, WLB continues to generate a significant portion of its revenues from a small number of customers. In 2013 the company derived 67% of its total revenues from five US power plants, one of which is under heavy fire from environmentalists. From their most recent 10-Q: “A consortium of environmental activists is actively pushing to shut down one-third of the nation’s coal plants by 2020. They are taking particular interest in Colstrip Units 1 and 2 and are actively lobbying the U.S. Environmental Protection Agency, or EPA, to require cost-prohibitive pollution control equipment.”
I’m not rushing to put new money to work in WLB. I’m also not sour on the prospects. WLB is incredibly well-run, they’re building out an incredible infrastructure of mines and systems in the northern middle states and southern Canada, and they’re sticking with their mine-to-mouth model that has been the catalyst for incredible shareholder returns over the past 15 months. I’d like to see the results of one more quarter’s operations at the newly acquired mines. I’d also like to see the company build back some cash reserves. WLB has been a beacon of ingenuity in the coal industry; the next three to six months will tell us whether or not the company will continue to outperform.
Thanks so much, blueice. Hope you made out on the investment!
Interesting perspective here. http://seekingalpha.co... offers a pretty valuable perspective as well.
Thanks, DanoX. I tried to keep this article as objective as possible without commenting much on the actual valuation. Wanted to address this one variable - weather - and its impact on driving user adoption. As for $436, I think you might be right. I do think that the company has lots of promise going forward, but short-term stock performance might not reflect that promise.
Nice points folks. When I say 14x is cheap-to-fairly priced I mean comparatively. Look at 2007 when we first hit Dow 14,000. Stocks were trading over 17x then. I use the 14x point to illustrate that we're not overextended to the point of peaking, though you're right that using the term 'cheap' is not a fair assessment. I'm not sure if we're headed up or down but I do know that we're not in for the collapse that we've been hearing about this past week or so.
Really interesting point. I didn't know that about the managers. This 5 year plan is going to be tough. There is certainly implied risk with this stock. But if it works, we're looking at a generational turnaround.
You should make sure that you mention to the SEC that I submitted this article on Sunday night and it wasn't published until today. Good luck that.
How much did you pay for them?
"Canaccord Genuity has slashed its sales estimates for the new BlackBerry Ltd. smartphone, saying checks in the U.K. and Canada show only a modest initial performance and arguing that carrier support in the U.S. for the device is limited.
In a note to investors Tuesday, Canaccord analyst T. Michael Walkley said the Waterloo-based company will sell only 300,000 BB10 units in the quarter ending March 2, down from his earlier forecast for 1.75 million sales. "
"Walkley reiterated his bearish sell rating on BlackBerry shares and his $9 (U.S.) price target. BlackBerry shares closed in New York at $14.35, a gain of 1.4 per cent on lower than average volume. "
"Deutsche Bank in a survey 30 carriers in the U.K. and 30 in Canada found only one store sold out in Britain. It said Canadian carrier retailers have fared better but on small initial inventory."
Both Canaccord and Deutsche Bank are bearish on the stock.
Thanks for your comment, hje. Seeking Alpha is a fundamental website, not technical. I'd be happy to discuss this beautiful chart's analysis with you offline.
Sorry about that. The $130 input into my system as $230 - typo on my part. See my comment above. I agree that this is a buy, and perhaps even start building your position now. I do see some downside short term, but with a longer-term horizon, you'll make money by being long BBRY.
I don't disagree with you. But I don't fully agree, either. You can start to build a position at this point, but as noted in the article, the stock is seeing high levels of volatility. If you're looking at investing in BBRY as a value stock, you should note that a $1.00 swing (which could happen in 15 minutes of trading tomorrow) is a 7% decrease.
I would only advise against building your whole position at this level. Take a dip, buy 25% of what you intend to buy. If the stock starts to rise again, then average up with the trend. If it continues its downtrend since the BB10 launch, you'll be able to acquire 75% of your position at a lower (potentially much lower) price.
I did cover the position. Didn't anticipate such a quick pop today so I missed a bunch of it. Continuing to play within the bands, though.
Agreed, which makes it a dangerous play. Investors ought to be wary - or at least vigilant - of the burn rate and their amount of debt.
Thanks @frc47. You can use a standard envelope or Bollinger Bands, depends how you want to judge. For my standard envelope I use 10%, which is a bit wide, but I've found that JRCC does bounce well between the wide range because of the high volatility.
I think you hit the nail on the head here, @Tactical111 -- greed kills in this stock. Play the envelope and you'll make money. If it runs past the envelope then it runs, but it's better to make profits on lots of these swings and miss the big run than to lose on most and maybe hit on the big one.