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Walter Industries

Kohlberg Kravis Roberts

Energy XXI

Gene Marcial on Investing

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Coal Glows Hot at Walter Industries

Although coal's price has cooled along with oil's, shares of coal producers are still on fire. A month after this column highlighted Alpha Natural Resources (ANR) in mid-June, that major source of metallurgical coal, used to create steel, got a buyout bid from Cleveland-Cliffs (CLF), a big steel industry supplier. Another metallurgical coal producer, Walter Industries (WLT), which isn't involved in any deal, is also attracting investors.

"Despite the pullback in energy prices, Walter continues to show strength, in part due to talk that it also may be takeover bait," says Bernie Schaeffer, CEO of Schaeffer Investment Research, which owns shares. Now at 84.14 a share, the stock should climb to 160 in 12 months, says Schaeffer, who tags Walter an "outstanding play in the long-term viability of coal as an energy source." With America's rich supply of coal, any breakthrough in clean coal technology would make the ore even more vital as an energy source, he notes.

Research outfit ValuEngine recommends Walter as a buy, saying it will probably outperform the market over the next year. "The company exhibits attractive momentum, good five-year annualized returns, and healthy growth of expected earnings per share," according to a ValuEngine report.

Zacks Investment Research puts the consensus earnings estimate at $5.98 a share for 2008 and $15.55 for 2009.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

A Healthy Yield at Kohlberg Capital

After Jerome Kohlberg left buyout firm Kohlberg Kravis Roberts (KKR) in 1987, he formed Kohlberg & Co., which formed six equity funds that acquired more than 50 companies worth $7 billion. Kohlberg & Co. and its affiliates also own a 15% stake in beaten-down Kohlberg Capital (KCAP), which specializes in secured loans to midmarket private concerns. As a business development company—a publicly traded outfit that invests in promising companies—Kohlberg Capital is regulated and must pay 90% of its net income to stockholders as dividends. Its stock, now at 9.45 vs. 16 a year ago, has fallen along with financial shares.

Now, Oppenheimer's (OPY) Robert Simmons calls the stock undervalued with a dividend yield of 18%. The company, he adds, has raised its dividend quarterly. He rates the stock outperform, with a 12-month target of 13.50.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Why Energy XXI Could Pump Up

Oil stocks have dropped as the price per barrel has retreated. Among the big losers: shares of small oil and gas explorers, such as Energy XXI (Bermuda) (EXXI), whose assets are concentrated in the Gulf of Mexico and Southern Louisiana. On Aug. 13, Energy's stock sank to 4.58, down from nearly 8 in May. Even so, David Adams of investment firm Jefferies (it has done business with Energy )rates it a buy, with a target of 8.50, based on Energy's proved and probable reserves. "EXXI offers an attractive valuation with substantial upside via exploration," says Adams.

Kelli Francis of researcher John S. Herold puts Energy's total proved reserves at 55.6 million barrels of oil equivalents as of June 30, 2007. She sees production rising to 9.5 million bbl. in 2008 and 10.5 million in 2009, up from 2007's 5.9 million. Francis forecasts earnings of 51 cents a share in 2008, vs. 29 cents in 2007.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial