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Walter Energy, Inc. (WLT)

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We downgrade our recommendation on Walter Energy Inc. (WLT) to Underperform from Neutral as the current depressed trend in thermal coal prices and increasing cost from the company's U.K. and Canadian operations take a toll on the company's profitability. We believe these depressed trends will persist in the coming quarters.

The obligation to fulfill environmental regulation is also expected to limit Walter's cost-cutting program. Also, the company's narrow capex outlook for 2012 is expected to shake investor confidence. The failure to add reserves and fluctuations in input prices are other negatives that could offset Walter's growth.

The trailing 12-month EV/EBITDA multiple is lower than the industry average. Our $28.00 target price is based on 2.7x trailing 12-month cash flow per share.

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