Tuesday, July 29, 2014

Wal Mart is a Welfare Client?

Great comment at the CoBF:

"I decided that Walmart is a bubble stock.

It's at 15x earnings and those earnings are inflated by government welfare programs.  Essentially, they pay less than a living wage, then the government buys food for their employees "the working poor", and the Walmart shareholders pocket the difference.

Not sure when that market distortion is going to end.  It would take a big political change to get the federal minimum wage raised up to the "living wage" level.  That would be the level at which Walmart would be feeding and clothing their own workers, rather than having the government essentially make payroll for them."
WMT has TTM net income of ~$16 billion and apparently 2.2 million employees - profit per employee of $7,270.

Partial List of Met Coal Miners in U.S.

  • Alpha Natural Resources - earnings August 6
  • Arch Coal - Q2 report: "'Recently, we’ve announced the idling of our Cumberland River complex in response to weak global metallurgical coal prices,' said Eaves. 'Although idling higher-cost coking coal capacity lowers our metallurgical coal volume expectations for 2014, it also shifts our mine portfolio toward higher-margin metallurgical coal operations and enhances our competitive cost position in that region.'"
  • Consol Energy - Q2 report
  • Cliffs Natural Resources - Q2 report: "During the three months ended June 30, 2014, our North American Coal business segment market pricing has continued to be affected by various supply and demand pressures in the metallurgical coal markets, which has impacted negatively revenue by $65.3 million and decreased our realized revenue rate by 30.6 percent."
  • James River Coal
  • Patriot Coal
  • Teck Resources - Q2 report: "Coal prices in U.S. dollar terms were lower by 29% in the second quarter of 2014 compared with a year ago and 15% lower than the first quarter of 2014."
  • Walter Energy

"SNL Energy: James River Coal's recovery from bankruptcy could be hindered by contracts" $JRCC

Wow, no wonder they have to keep postponing the auction, indeed - SNL article:

"But James River also is burdened by a wealth of expiring utility contracts and a sharp decline in coal purchases in 2013 compared to 2012. The biggest blow was Southern Co.'s decision to all but cease coal purchases from Central Appalachia by 2016 and retire units at three older, coal-fired power plants in Georgia.

On a companywide basis, James River was the largest supplier of Central Appalachian coal to Southern plants in 2012, shipping 1.7 million tons to the company. Southern was James River's largest utility customer overall in 2012, and it purchased exclusively Central Appalachian coal from the company.

Based on U.S. Energy Information Administration fuel contract data, nearly 51% of the Central Appalachian coal and about 31% of the total coal delivered to electric utilities by James River in 2012 went to Southern-operated plants. The diminishing number of sales contracts also may limit interest in James River's assets."
CAPP coal can't compete with PRB coal, which is an order of magnitude more efficient per employee hour.

2014 Q2 Earnings Calendar

Walter Energy - before market open on Thursday, July 31, 2014
Radio Shack - est Aug 1?
Molycorp - August 6
Dendreon  - August 4 - August 8
NII Holdings - est Aug 11 - Aug 15

Monday, July 28, 2014

More Thoughts on Walter Energy Cash Flows

This is very rough, lots of unknowns, but just some back of the envelope math:

$405 million: 3/31 cash balance
-$218 million: *cash* interest expense
-$130 million: management capex target for year
+$12 million: capex spent in Q1
+$25 million: sale of Blue Creek terminal
-$75 million: operational loss Q2-Q4 of 2014 based on cash cost 105 and met coal price 95 for 7.5mmt
$19 million projected cash balance YE 2014

My numbers may be off on the operational cash cost and met coal price. They could conceivably borrow more money (subject to leverage covenant on bank loans), slash capex more, sell more assets (tough market though), or maybe liquidate more inventory to raise cash.

"Baby Boomers have lived in a world where almost any financial decision was rewarded"

A correspondent sent in an excellent comment found in a blog comments section:

"While it doesn’t make for a very pleasant society to have a large and growing wealth divide, the VAST majority of people simply couldn’t care less about having any financial competence. This study [pdf] shows that 70% of the US population cannot answer three extremely basic questions about finance.

This correlates almost perfectly to the number of people who are losing wealth. The questions should be incredibly easy to answer for any functional adult. Here is one:

'Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow: [more than $102; exactly $102; less than $102; do not know; refuse to answer.]'

If you are unable to answer that you fit into the 'fool and his money' portion of society. I have personally found the complete lack of interest in finance to be a strong feature of society. More and more I am beginning to wonder why my knowledge of the field is expected to count for nothing and why the fact that my wealth routinely grows during good and bad times is seen as some type of pathology. If I train two hours a day on the golf course why would you expect to beat me as a once a year player?

Baby Boomers have lived in a world where almost any financial decision was rewarded. They are clueless that things have changed. When they were young adults 10% cap rates on real estate were routine. Now they are typically negative in many markets! They have seen wild asset price appreciation on a multi decade timeline on EVERY asset class. There simply was nothing they could buy that didn’t increase in value. Those days are over – almost certainly for many decades. Having some interest in the basics of money going forward is essential if you don’t want to go backwards. Being lazy and winning financially has worked since 1980 but is very dead."

Sensitivity of Households and Corporations to Interest Rate Increases

A correspondent sends in this link:

"The implications are that households and corporations are both extremely negatively sensitive to interest rate increases. They are both extremely negatively sensitive to tax increases. They are extremely negatively sensitive to cuts in government funding."