Walter Energy (WLT +0.8%) is Simmons & Co.’s "preferred way of playing a rebound” in...

Walter Energy (WLT +0.8%) is Simmons & Co.’s "preferred way of playing a rebound” in metallurgical coal, and could be poised to have a better operational year in 2013 resulting in strong earnings growth. The market does not fully appreciate the value WLT’s portfolio has in an improved met market, the firm says. However, Iberia Capital downgrades shares on valuation.

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  • neonlight5
    , contributor
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    Time and again, WLT trades down on so called "sell side analyst downgrades". Many of the sell side research firms have been late to the game on downgrading WLT (I mean, who is going to recommend a sell when everything is bright and rosey and met coal prices are at $320/ton). GS (the perma bear on WLT) has had a constant sell rating on the Company, with a price target of $27 (in Nov 11) based on valuation. Now Iberia has a sell - but who is Iberia? Would like to see what wild earnings estimates have been published.
    The one firm which I lend credibility to is DB. Analyst believes any upside has already been priced in (at $38-$42/share, its hard to argue against it. The only other catalyst would be higher met prices, significant cost reductions or more takeover rumors).
    Cutting through mostly exogenous factors, WLT, I believe, is a viable turnaround met coal producer. The Western acquistion is arguably questionable and WLT may have looked like a better take-out candidate without Western assets -but we wont cry over spilt milk. The revamped management team is now focused on optimizing Canadian operations (any thoughts on how well/badly they are doing?). Balance sheet is debt laden post the acquisition, but I believe they have the cash generating ability and margins to support this downturn in prices.
    Company is well positioned amongst its customers (more so in Brazil vs Europe) and its high quality coal sells itself. Would be interested to see how it can exploit selling into Asia (China and India) as it is still a small part of their base.
    There is always more than could be done. I would love to see more communication and disclosure from Management. So far there has been an improvement, but I believe they could take a page or two from BTU.
    Revisiting macro/exogenous factors, a China rebound, flooding in Queensland or other geological issues could be the catalyst needed for a short term spike in met coal pricing. Long-term, high quality met coal is a limited resource and current prices are not sustainable given cash costs. Given the agressive cost cutting and supply side responses from most coal producers and a more optimistic tone on the global economy, I dont see what the next leg down could be - would love insight/thoughts on this.
    At current conditions not expected to improve in the next 6 months, WLT is NOT a screaming buy at sub $38/share. But with contract prices at trough prices of $160/tonne, mgmts focus and attention on reducing cash costs, increasing cash costs in Australia, generally poor quality met coal in Mongolia and Zambia (and lack of infrastructure), a general sense of a "more stable" management team at WLT and the constant chatter about a takeover (IMO, this is not likely to happen in 2013), this Company offers attractive risk/reward to those with a 2-3 year hold and offers a good trading opportunity to those who know this Company.
    Bottom line is, the sell-side has a tendency of being late to the when it comes to downgrades and any resulting down move is an opportunity to assess the fundamentals of the Company and the industry. Happy to hear any thoughts.
    11 Jan 2013, 02:31 PM Reply Like
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