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We reiterate our Neutral recommendation on Walter Energy Inc. (WLT - Analyst Report). The premium metallurgical (met) coal export company currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
Walter Energy is expected to gain from the rise in metallurgical coal exports on the back of thriving steel markets worldwide. The growing infrastructure activities in India, China and Brazil will primarily lead to the increase in demand for met coal. World Steel Association projects 3.2% year-over-year growth in world steel production in 2013.
In addition, the company’s strategic location near the Atlantic as well as South Pacific allows it to easily tap the profitable Latin and European markets.
Going forward, Walter Energy’s cost-containment efforts were successful with the company recording significant decline in its cash cost of production in the fourth quarter 2012. Further, the planned production cuts at several of its low-return coal mines will aid in controlling costs.
However, stiff competition from met coal producers in Australia and Canada might act as a deterrent to growth. Moreover, the continued weakness in the thermal market would prove to be a drag on Walter Energy’s business.
The company’s first quarter preliminary results look modest with met coal sales increasing 9% sequentially to 2.8 million metric tons. On the other hand, the downturn in thermal coal persisted with sales dropping 40% sequentially to 380,000 metric tons.
Other Stocks to Consider
Other stocks in the energy space performing well are Atmos Energy Corporation, (ATO - Snapshot Report), Vectren Corporation (VVC - Snapshot Report) and The Laclede Group, Inc. (LG - Snapshot Report). All the above three stocks hold a Zacks Rank #2 (Buy).