Walter Stays Neutral

We reiterate our Neutral recommendation on Walter Energy Inc. ( WLT - Analyst Report ) . Despite registering year-over-year growth in volumes and sales, Walter Energy put up an uninspiring show in the first quarter of 2012. Earnings slipped to 65 cents per share versus $1.53 reported in the year-ago quarter and fell below the Zacks Consensus Estimate of 79 cents per share. Despite the weak profits, Walter Energy is focused on investments in growth projects that would help optimize returns in the future. For example, its overseas project at the Aberpergwm mine in Wales looks promising.

However, the mining of coal reduces the volume of the coal reserves. In the event of a failure to back up its reserves on a continuous basis, the company’s financials could well suffer. Besides, the company generates a substantial part of its revenue from long-term contracts with a limited group of customers. Failure to renew or obtain new long-term coal supply contracts could pose serious threats to its income growth.

Other negatives that might keep a leash on the company’s growth include rise in prices of input materials and unforeseen interruptions or lag in the production process. Walter Energy expects its total coal production in 2012 to be in the band of 11.5 million metric tons(MMTs) and 13 MMTs. Out of the total production 75% to 80% will be Hard Coking Coal and the balance will be the Pulverized Coal Injection coal.

The company is one of the largest producers of premium metallurgical coal in the world. With the expected revival of the global steel industry, Walter Energy should generate favorable returns with its hardened focus on enhancing metallurgical coal production. Moreover, it strives to work towards maintaining a healthy balance sheet with a flexible liquidity portfolio which will enable the company to favorably execute its growth related projects.

The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently pegged at 87 cents per share and $4.43 per share, respectively.

The company presently retains a Zacks #3 Rank which translates to short-term Hold rating. Its business competitors are Alpha Natural Resources Inc. ( ANR - Snapshot Report ) and Arch Coal Inc. ( ACI - Analyst Report ) .

Based in Birmingham Alabama, the company is engaged in the production and export of metallurgical coal for the steel industry. The company also produces thermal and industrial coal, anthracite, metallurgical coke, coal bed methane gas, and other related products. It principally serves electric utility and industrial customers.