Shares of Takeover Target Walter Energy Are Going Cheap

| About: Walter Energy, (WLT)

Walter Energy (NYSE:WLT) produces and exports metallurgical, or 'coking coal', which is used to forge steel. The company's product is great for steelmakers due to its above average purity and high heat rate. Kieth Calder, CEO for only three months, recently announced he would step down because his 'management philosophy' conflicted with that of the board of directors. This abrupt move prompted hedge fund advisor Audley Capital (which owns 1.5%) to recommend that the company sell itself. Some analysts estimate shares of the company could jump 200% or more (based on today's closing price of $74.15) in a potential buyout based on the earnings multiple given MacArthur Coal Ltd. (OTC:MACDF) by mining giant Peabody Energy (NYSE:BTU) and steelmaker ArecelorMittal (NYSE:MT).
There is a lot to like about WLT. It has higher margins than Arch Coal (ACI), Alpha Natural Resources (ANR), Peabody Energy and CONSOL Energy (NYSE:CNX). That means it squeezes more profit out of every dollar than its competitors. Its one and three year Return On Equity numbers are impressive at 91.15% and 73.96% respectively.
Return on Equity is a measure of how effective management has been at converting shareholders' money into profit. The company's five year EPS growth rate is an impressive 49.84% compared to the coal industry average of around 11%. WLT also has around $125 million in cash.
Although the company has had three straight misses on quarterly earnings, the shares have been punished enough. Adding the first two quarters EPS to consensus analyst estimates for EPS in Q3 and Q4, the company should make around $10.50 per share this year, which, if divided into the current share price, yields a rock-bottom price-to-earnings ratio of around 7. By comparison, CONSOL Energy and Alpha Natural Resources are trading at 14.2 and 9.44 times this years earnings respectively.
The stock is now on sale, trading down more than 30% since August 4, when the company missed analysts' earnings expectations by 40%. Additionally, the stock is now off more than 50% from its 52-week high of $143.76 reached on April 8. Since August 7, seven different insiders have bought shares. Despite the CEO turmoil and the earnings misses, Walter Energy is both a quality company and a takeover target. I would buy now while it is still a bargain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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