Walter Energy, Inc. (WLT): Classic Turnaround Play or Value Trap?

Deep Value and leveraged to the future of Metallurgical Coal

What about the possibility that Walter could go bankrupt? After all, if a company can’t survive long enough to enjoy an eventual recovery it makes little difference. Looking at Walter’s balance sheet, it’s clear that the company does have a high debt to asset ratio, with $5.9 billion in assets supporting $4.9 billion in liabilities. Such a high debt/asset ratio means Wall Street has reason to be concerned. However, a glance at the income statement and cash flow statements shows that for the three months ended March 31 the company lost approximately $50 million on a GAAP basis, but its actual cash losses from operations came to just $20 million. This is hardly critical to a company with $235 million in cash on hand at the end of the quarter.

By contrast, earnings last peaked in FY2010 when Walter earned a net profit of just under $400 million. While the company does carry a significant debt load, Walter Energy, Inc. (NYSE:WLT) has no significant debt maturities until 2016 when a $750 million term loan comes due. This gives the company, and its major customers in the steel industry, a full three years to gain their footing.

The bottom line

While it’s clear that Walter Energy, Inc. (NYSE:WLT) faces some headwinds, long-term investors might find shares of WLT worth a look. The metallurgical coal industry is not going anywhere despite attempts to curb usage in its sister industry thermal coal and debt maturities within Walter’s balance sheet remain far enough off to give the company time to maneuver. Looking more closely and seeing if it has a place in their portfolio might just be one of the most Foolish things long term investors could be doing today.

The article Walter Energy: Classic Turnaround Play or Value Trap? originally appeared on Fool.com and is written by Sean O’Reilly.

Sean O’Reilly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Sean is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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