According to a 13G filed with the SEC, billionaire Steve Cohen’s SAC Capital Advisors recently owned 3.3 million shares of Walter Energy, Inc. (NYSE:WLT), a $1.8 billion market cap coal miner. We track 13F filings from hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can also see from this database that SAC had reported a position of 1.7 million shares at the end of December (see more stocks Cohen reported owning), so the fund has roughly doubled the size of its position so far this year.
Walter is a leading metallurgical producer, and also mines thermal coal and other minerals. The company reported 7 million metric tons of met coal and 3.1 million metric tons of thermal coal. Metallurgical coal is a crucial input in steel production, where demand has been low in the last couple years due to macro factors (Walter’s beta is 2.1, demonstrating the company’s general sensitivity to economic conditions). Thermal coal- also known as steam coal- is purchased by electric utilities for power generation purposes, and has also been a struggling industry (at least in the U.S.) due to the abundance of cheap natural gas. Walter’s revenue declined 7% last year in comparison to the recast 2011 numbers, and operating income (after adding back a large goodwill impairment and other special items) came in at only about $100 million, down from about $570 million. The company also recorded over $100 million in net interest expense, making Walter unprofitable for 2012 even after the addbacks. The stock price has fallen 54% in the last year.
Other producers of thermal and metallurgical coal include Arch Coal Inc (NYSE:ACI), CONSOL Energy Inc. (NYSE:CNX), Peabody Energy Corporation (NYSE:BTU), and Alpha Natural Resources, Inc. (NYSE:ANR). Arch Coal and Alpha are actually forecasted to have negative profitability in 2014, and revenue at each of those companies was down about 20% in the fourth quarter of 2012 versus a year earlier (in addition to stock prices which have been cut in half). Alpha and Arch Coal are also particularly popular short targets, likely due to their perceived weakness even among coal companies in general. Peabody and CONSOL have had a more modest reaction to industry dynamics, though even in those cases revenue was down about 10% last quarter compared to the fourth quarter of 2011. CONSOL is actually profitable on a trailing basis, with a price-to-earnings multiple of 21, and though that is high the company is at least starting from positive earnings in the event of an industry wide recovery. In terms of forward earnings estimates these two stocks are priced about in line with Walter.
Coal companies are in too poor a situation to be value stocks at this time, and we are skeptical that the market for thermal coal will improve by much in the near future. Barring industry consolidation an investment thesis would therefore rely on a ramp-up in steel demand; even if we were convinced that macro conditions (particularly in China and other developing countries) were strong enough to support higher steel production we would at least want to look at miners of steel, copper, and other industrial materials to see if they are better options than the coal miners.
Disclosure: I own no shares of any stocks mentioned in this article.
