Undervalued Warrior Met Coal FCF/EV Yield 28%, ROE 45%

Johnny HopkinsStocks3 Comments

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One of the cheapest stocks in our All Investable Stock Screener is Warrior Met Coal Inc (NYSE: HCC).

Warrior Met Coal Inc (Warrior) formerly called Warrior Met Coal LLC, is a producer and exporter of metallurgical coal for the steel industry from underground mines located in Brookwood, Alabama, southwest of Birmingham and near Tuscaloosa.

A quick look at Warrior’s share price history over the past eight months shows that the price is up 34%, but here’s why the company remains undervalued.

The following data is from the company’s latest financial statements, dated September 2017.

The company’s latest balance sheet shows that Warrior has $252 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $3 Million in short-term debt and $1.5 Million in long-term debt. Therefore, Warrior has a net cash position of $247.5 Million (cash minus debt).

If we consider that Warrior currently has a market cap of $1.289 Billion, when we subtract the net cash totaling ($247.5 Million) that equates to an Enterprise Value of $1.042 Billion.

If we move over to the company’s latest income statements we can see that Warrior has $408 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 2.56, or 2.56 times operating earnings. That places Warrior squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Warrior generated trailing twelve month operating cash flow of $355 Million and had $66 Million in Capex. That equates to $289 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 28%.

In terms of Warrior’s annualized Return on Equity (ROE) for the quarter ending September 2017. A quick calculation shows that the company had $797 Million in equity for the quarter ending June 2017 and $914 Million for the quarter ending September 2017. If we divide that number by two we get $855 Million. If we consider that the company has $392 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending September 2017 of 46%.

The company also has an Altman Z-Score of 6.65, indicating it is in the safe zone and showing no signs of distress.

In summary, Warrior is trading on a P/E of 3 and an Acquirer’s Multiple of 2.56, or 2.56 times operating earnings. The company has a strong balance sheet with cash and cash equivalents of $252 Million and just $4.5 million in total debt. Warrior has a FCF/EV Yield of 28% (ttm) and an annualized Return on Equity (ROE) for the quarter ending September 2017 of 46% (ttm). All of which indicates that the company remains undervalued despite the 34% gain since April 2017.

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3 Comments on “Undervalued Warrior Met Coal FCF/EV Yield 28%, ROE 45%”

  1. Warrior paid a large special dividend of around $11 per share in November so its cash position would be lower than the most recent financial statement indicate. That’s why you see a large drop in the share price at that time.

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