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Walter Energy Upgraded to Neutral

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On January 18, 2013, we upgraded our recommendation on Walter Energy Inc. to Neutral from Underperform. The company currently has a short-term Zacks Rank #3 (Hold).

Why the Upgrade?

There are several significant growth factors, which allowed us to improve our recommendation on the stock.

As per the International Energy Agency’s projection, the coal industry will grow at an average rate of 2.6% till 2017 due to an increase in coal-consumption, primarily in India, China and South Korea due to increase in power generation.

In addition, entry to the prospective Latin American steel markets will open up new possibilities for Walter Energy’s forthcoming growth.

We view Walter Energy as an organization committed to maintain a strong balance sheet with a flexible liquidity position. The company’s cash balance was $129.9 million as of Sep 30, 2012, marginally up from the year-end 2011 level. During third-quarter 2012, the company had solid operating cash flows of $333 million, which will enable it to execute its growth projects.

However, we are skeptical about several regulatory pressures, which could undermine the company’s aforementioned growth factors.

Other Stocks to Consider

Apart from Walter Energy Inc., other coal companies Natural Resource Partners L.P. (NRP - Free Report) and Hallador Energy Company (HNRG - Free Report) are currently performing well and carry short-term Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively. Arch Coal Inc. , a peer of the company, currently has a short-term Zacks Rank #3 (Hold).

Birmingham, Alabama-based Walter Energy produces and exports metallurgical coal for the steel industry, primarily in the United States. With market capitalization of $2.32 billion, the company has 4,200 total employees.

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