Walter Industries, Inc. (WLT)

HOLD ONTO WLT because its story is just now beginning to look good.








WLT is primarily a play on Met Coal ..or coal that is used to make COKE and steel. There is also a homebuilding and mortgage component, but that part of the business is: 1. Holdings its own right now. Not setting the world on fire, but not losing a ton of money either. and 2. It is up for sale. Once the mortgage and homebuilding side is sold, the WLT balance sheet will look a heck of a lot better because the debt necessary to carry those mortgages will transfer with the mortgage business. In addition, the factory-built homes which Jim Walters builds actually sell better during hard times because they are very cheap (avg. price currently is $97K) compared to on-sight built homes.





The real long-term value in WLT comes from the met coal side of the business. Last year, WLT sold this met coal for an average price of $89/ton and the average cost of mining was in the neighborhood of $55/ton. The difference was about $44/ton. Next year however, coal met coal prices will be in excess of $125/ton (some predict $155/ton) while the cost of extracting that coal will actually go down for WLT because the efficiency of the two primary mines is now increasing after WLT struggled with rearranging two of its mines last year. Next year the difference between the cost of mining and selling this met coal will be in the neighborhood of $75 to $90 ton. In addition, the production of that met coal will increase from 6 million tons to 7-7.5 million tons based on WLTs growth forecast.





It is also worth noting that the prospects for American met. coal sales to Europe now look excellent because the dollar is so weak. In addition, the major world supplier of met coal, Australia, is now limited too how much it can ship because of port loading backlogs in the key Aussie port for coal shipments.





And, the thermal coal operation which WLT just bought last quarter, will, according to WLT produce about 800,000 tons of coal this year. Because of the weak dollar, thermal coal exports to Europe are also expected to be at all time highes next year in terms of both tonnage and price.





It is also likely that WLT will sign longer than one year contracts for both the met coal and the thermal coal. Since doing that would benefit both WLT and its customers right now.





As a result of all these expectations, analysts currently have a $3.02 EPS target for 2008 and $4.88 EPS target for 2009.


http://www.nasdaq.com/earnings/earnings_forecast.asp?symbol=WLT&selected=WLT





As a final kicker, the press recently mentioned that WLT was a potential candidate as a takeover target to a European Steel company.





http://biz.yahoo.com/bizj/071203/1558601.html?.v=1





Since doing this would mean that the European steel company could limit its cost of coal to the cost of extracting it from the ground for the next decade or so, that actually makes a whole lot of sense.