Can You Energize Your Portfolio With Walter Energy?
Jul 6th 2012 9:26PM
Updated Jul 6th 2012 9:32PM
With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.
Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly-rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.
By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies from which to begin your own due diligence and research.
Buy what you know
Based on my outperform ratings on coal miner Alpha Natural Resources (NYS: ANR) , as well as my underperform rating on Patriot Coal in the broad energy sector, the CAPS supercomputer thought I also might be interested in another coal miner, Walter Energy (NYS: WLT) , one of five Stocks of the Day that it offered up for my consideration last week.
There's been no real change in attitude by President Obama towards the coal industry, and that has sunk the fortunes of numerous players, as they're pushed towards the edge of ruin. So let's see what Walter has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.
Walter Energy Snapshot
|Industry||Oil, Gas & Consumable Fuels|
|Market Cap||$2.6 billion|
|Revenues, TTM||$2.8 billion|
|Return on Capital, TTM||12.3%|
|Dividend & Yield||$0.50/1.10%|
|Long-Term Debt||$2.3 billion|
|Free Cash Flow, TTM (OCF-CapEx)||$115.9 million|
Source: Motley Fool CAPS; S&P Capital IQ
A fossilized industry
With environmentalists believing that the country's energy needs can be met by using alternative sources such as solar, wind, and biomass, the fossil fuels industry has come under heavy fire. Coal mining, of course, is seen as a "dirty" industry, and utilities are being both pressured and incentivized to switch away from firing their plants with coal. While that's pushed many towards natural gas, environmentalists attack the means by which it's recovered, and oppose hydraulic fracturing, or "fracking," as it's called.
Oil, as well, is under the gun. After the BP oil spill in the Gulf of Mexico, all deep water drilling was banned for a time, and then permits to restart were slow in being issued. It's only recently that deep water drillers have regained their footing. And, of course, there was TransCanada's (NYS: TRP) Keystone XL pipeline, that would have brought cheap oil from Canada to the U.S -- but President Obama spiked the deal. Canadian officials are now moving forward with plans to sell their cheap oil to China.
Both coal and natural gas are cheap, plentiful domestic energy sources, but it's become increasingly difficult to see them proliferating.
Going where the money is
Yet, both industries also see international markets as their salvation. Natural gas wants to export its liquids to foreign markets, while coal is hoping China's insatiable demand for it will help resurrect its prospects. China accounted for almost 10% of the world's coal consumption. Europe, as well, has seen its appetite for coal expand, according to the BP Statistical Review of World Energy 2012, with it representing 30% of the global energy consumption last year. Demand for coal surged 5.4%, the fastest among fossil fuels. In comparison, U.S. consumption fell 4.6%.
Arch Coal (NYS: ACI) opened a London office this year, as it spearheads plans to export to Europe, along with Alpha Natural Resources and Peabody Energy (NYS: BTU) . For Walter Energy, it's not so much coal for energy purposes, but steelmaking that drives it forward. It is the world's leading publicly traded pure play coal producer, and its purchase last year of Western Coal gave it a reach into Europe.
Following the Great Recession, the steel industry fell hard and, after climbing back, it's poised to topple once again, as Europe's financial crisis and China's hard economic landing make further growth difficult. Still, it's not so much that consumption will decline but, rather, that the rate of growth will slow. The CEO of Russia's second largest steel producer is counting on China to prop up the industry. Isn't everyone counting on that?
I'm not so sure China can do that and, if China goes, so goes Europe and then the U.S. As a result, I'll be rating Walter to underperform the market indexes on CAPS.
Risk without reward?
Add Walter to your watchlist to see if it can overcome these obstacles, but also let me know on the Walter Energy CAPS page, or the comments section below, if you think it's a situation that only works itself out later rather than sooner.
If Walter Energy's growth ambitions pique your interest, the Motley Fool has identified a company that will prosper for years to come. Read more about the one energy stock set to soar in the Fool's special free report "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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