The 3 Week Diet System

Wednesday, May 13, 2015

Walter Energy Is A 'No-Touch' Stock

May 13:


  • The coal market will probably not recover in the next few months.
  • The company has a negative working capital.
  • On the other hand, it is not a good idea at all to short the stock.
Walter Energy (NYSE:WLT) is a leading producer coal for the global steel industry. The firm has many mines located in the United States, Canada and United Kingdom. The company is recognized has a pure-play metallurgical coal player. It employs approximately 2,700 employees across its operation around the world.
(Click to enlarge)
Due to the weak coal price, I am really worried about the future of Walter Energy. As I wrote in a previous article, a rebound in the metallurgical coal price is now imperative for the firm. Sadly, it is really unlikely to happen in the short term. The following statement from the manager of the coal division at Rio Tinto is very compelling.
In coal, we have to be ready that we have multiple years, it could be even three or four years, before we see an inflection point.
With the many bankruptcies in the coal sector, it will inevitably have a rebound in the price in the future. On the other hand, the rebound might be too late for Walter Energy to survive.
In fact, Walter Energy has huge financial obligation in the coming years. The negative working capital reflect this disastrous situation. With current assets of $889 million and current liabilities of $3,461 million, the firm has not an healthy balance sheet. Moreover, the cash and cash equivalent totaled only $435 million. The balance sheet of the company prove these numbers.
(click to enlarge)
It is also possible to calculate a current ratio of 0.25. Without a doubt, its is really bad. It only means that the current liabilities are around four times bigger than the current assets.
The income statement is not better. With a trailing twelve months EBITDA of minus $66 million, the company can't count on its operations to improve its working capital. Without a doubt, the firm will have the seek help from its debt holders. In my opinion, the bankruptcy seems to be the only possibility.
Moreover, I want to point out the price to book ratio of 0.026. Based on this ratio, the market already price the bankruptcy in my mind. All the negative factors are already priced in. Consequently, it is extremely risky to short the stock at the moment. Any positive news or any improvement in the coal price could send the stock price to the moon. I think that Walter Energy is a no-touch stock and shorting the stock is not a good idea at all.
Sadly, some firms share this opinion about Walter Energy. According to this article, BB&T Capital predicted that the metallurgical coal producer and exporter would file for bankruptcy in 2015.
On the other hand, the demand is increasing in India and there are many production cutbacks in the industry at the moment. These factors could lift the coal price sooner than expected.
In conclusion, the financial situation of Walter Energy is not rosy at all. On the other side, it is a really bad idea to short the stock at the moment. I believe that the best way to trade the stock is to wait and watch. Any positive news or catalysts could be extremely positive for Walter Energy. Please, keep these positive factors in mind. This article reflects my opinion only. I am not a financial advisor. Consequently, please do your own due diligence and consult your financial advisor before taking any decision.
The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.


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