Investors cheer Walter Industries' exit from homebuilding

By Bhaswati Mukhopadhyay

BANGALORE, Jan 20 (Reuters) - Analysts expect the battered stock of Walter Industries Inc (WLT.N) to regain lost ground, as the company repositions itself as an energy firm and exits its loss-ridden homebuilding business.

The company moved a step closer this month to phasing out its homebuilding unit and plans to spin off its financing unit -- JWH Holding Company LLC -- in early 2009.

Walter's homebuilding and financing businesses have been badly hit by the housing downturn and the mortgage crisis, putting pressure on the company's stock, which has dropped more than 80 percent since its year-high levels in June 2008.

"The spin off probably gives Walter the opportunity to get a pure coal-type valuation, which I think would be a positive," analyst James Rollyson of Raymond James said.

Analysts, however, warned that the going might not be that easy for the company as a deteriorating global steel market has hurt demand for inputs such as iron ore and metallurgical coal.

Walter primarily supplies coking, or metallurgical coal, which is used to make steel. Since September 2008, U.S. steel output has plunged about 50 percent to its lowest point since the 1980s, largely because of a steep decline in construction and auto production activities.

Steel buyers have been withdrawing orders because of the frozen credit markets and the slumping U.S., European and Chinese economies. However, analyst Rollyson expects metallurgical coal demand to improve in 2010 as credit markets free up and stimulus plans across several countries start kicking in.

Analyst Luther Lu of Friedman, Billings Ramsey & Co said: "Walter is as pure of a met coal player as you can get and because of that its shareholders will be very sensitive to the developments in the steel market." He has a "market perform" rating on the stock.

CHEAPER THAN PEERS

Raymond James' Rollyson, who has a "strong buy" rating on the stock, said Walter as a whole looks pretty cheap compared to its peers. The company's shares trade at a multiple of 4.41 times forward earnings, compared with a multiple of 15.32 for the coal and consumable fuels sector.

Walter competes with coal companies such as Alfa Natural Resources (ANR.N), Patriot Coal (PCX.N) and Massey Energy (MEE.N). The Tampa, Florida-based company has been beating market estimates for the last two quarters due mainly to strength in its core natural resources unit.

With the divestiture of the loss-making units now certain, the stock has pared some of its losses to gain 16 percent this year. Walter shares are now trading at $19.30 on the New York Stock Exchange.

Brean Murray Carret & Co analyst Michael Gaugler said he regards Walter shares as undervalued at current levels. Gaugler, who has kept his "buy" rating on the stock, said the company's low-cost structure leaves it well positioned relative to its peers to ride out the current weakened pricing environment. "We recommend the shares for patient investors with a 12 month to 18 month investment time horizon," Gaugler said. (Editing by Anil D'Silva)