Walter Industries: High-Grade Coal, Low-Priced Stock

Value investors are always attracted to beaten down industries. Everyone is scared of the market right now, but that should not detract from seeking out stocks that are cheap.

In that regard, the coal industry merits a closer look, specifically Walter Industries (WLT - commentary - Cramer's Take), a producer and exporter of metallurgical coal. The stock is now trading at $23, down from an all-time high of $111 just a few months ago.

Coal is dirty but it's cheap relative to other energy source and the U.S. has huge coal reserves. If President-elect Obama truly wants to slowly wean America off foreign oil, he won't do anything drastic to harm the coal industry.

Commodity companies are always victim to the underlying commodity price in the short run. Patriot Coal (PCX - commentary - Cramer's Take), International Coal Group (ICO - commentary - Cramer's Take) and Massey Energy (MEE - commentary - Cramer's Take) all have come down dramatically as the price of coal tanked in response to the economic slowdown, but they are also up a great deal from their bottoms.

Walter produces primarily Blue Creek, high-quality metallurgical coal from Alabama that commands premium pricing. The demand is greater for such higher-BTU, low-sulfur coal due to its cleanliness and heat production.

Like all commodity businesses shares, Walter rocketed when coal prices advanced in early 2008 and came crashing down when prices retreated. The company's primary end market is the steel industry, which explains the drastic fall in the stock price. However, the company also produces natural gas and sells about 7 billion cubic feet annually; this is a stable generator of cash flow during the recessionary period.

Walter's natural resource unit, Jim Walter Resources, earned an average operating margin of $64 per ton of metallurgical coal and $145 per ton of coke in the third quarter. The company reaffirmed its $90 per ton operating margin in the fourth quarter, mainly due to its fixed price contracts. The company is on track to sell more than 6 million tons of coal in 2008 and expects sales of 8 million tons in 2009.

---

At the time of publication, Gad had no positions in the stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund and the Gad Partners Offshore fund, value-centric investment partnerships based in Athens, Georgia. Gad has written extensively for the Motley Fool and was a securities analyst for UAS Asset Management, a small, value-focused fund in New York City in 2007. Previously, Gad managed assets for the Gad Investment Group. For additional information, please visit www.gadcapital.com.

Gad also runs a value-investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Send Sham Gad an email. You can reach Gad at [e-mail].