Investing

Whitehaven Coal: Quality, Value and a Dividend Yield of More than 10%

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Whitehaven Coal Ltd (AU:WHC, US:WHITF) currently sits at the top of the Fintel Quality+Value leaderboard as WHC stock is now trading more than 37% below its 52-week high price.

The leaderboard highlights stocks that can add excess alpha returns when added to diversified portfolios. The Quality+Value model surfaces stocks considered to be suitable for patient investors who want maximum returns over the long term and outperform the stock market.

This score is generated using a six-factor model that ranks companies on their cash-generating ability and growth. Additionally, there is a significant value factor in it. It identifies very good, durable companies with a large moat that have fallen into disfavor by the market yet are likely to recover.

I am bullish on the stock as it has both quality and value features now. This is explained with reference to valuation, financials and an attractive dividend yield.

The model, also known as the QuantSoft Score, was developed by Fintel founder Wilton Risenhoover and is based on research he conducted while at the UCLA Anderson School of Management.

In addition, independent analysis of the Quality+Value score found that an investing strategy based on the scoring model outperformed both the Russell 2000 index and the S&P 500 index over time. In one test, over the period of 1992 to 2013, the theoretical compound annual growth rate of the Quality+Value score was 20.73% vs. the Russell 2000 CAGR of 10.33%. In that analysis, the Sharpe ratios were 0.91 (Q+V) vs. 0.46 (R2000) and the Sortino ratios were 1.18 (Q/V) vs. 0.48 (R2000).

High Scores

The stock has a Quality Score of 97.44 (ranked 38 out of 11780), a Value Score of 96.50 (ranked 843 out of 23430), a Q+V score of 98.09, a Momentum Score of 12.55 (ranked 38842 out of 43420) and a Fund Sentiment Score of 47.58 (ranked 19734 out of 36459).

It is important to mention that the Quality Score identifies high quality companies, based on cash generating efficiencies, while the Value Score ranks companies based on their relative valuation. Scores range from 0 to 100, with 100 being the most undervalued. The Momentum Score ranks companies on their six-month momentum.

Previously, Whitehaven stock investors were rewarded for their patience when share price gained nine-fold AUD 1.76 back in June 2021 to AUD 10.96 in October 2022. The correction that has occurred now as the stock trades at AUD 6.95 presents an interesting investment opportunity. Here’s why.

Hidden Value

The shares are very attractive now as they traded at a price-to-earnings ratio of 1.79, and a price-to-book ratio of 1.20. At the same time the EBIT (3y)/EV ratio of 0.54 is very cheap, and the EBIT/EV ratio of 1.38 shows there is plenty of hidden value.

In addition, the P/TBV ratio of 1.21 is also very close to 1.0 suggesting that for a company with a plethora of hard assets, its shares are traded at a tangible book value that suggests the stock price is relatively undervalued. In general, companies may have paid for ‘intangible’ assets that have questionable value. It may well be the case that a company might have overpaid for an acquisition. Considering that higher P/TB ratios may be a sign that a company is overvalued, the shares of Whitehaven Coal appear to be relatively cheap.

Long Institutions

All of the 123 institutional owners holding WCH stock are long.

The financials and valuation metrics have improved a lot over the past four years.

Specifically, the P/E ratio was 16.01 back in June, 2016 and it even was -274.11 back in June 2020, but has been 1.88 in December 2022. The P/Book  ratio has declined from 2.41 in June 2018 to 1.27 in December 2022, and P/TBV ratio has fallen from 2.42 in June 2018 to 1.27 in December 2022.

For a company that its core business is in the Energy Sector the management effectiveness in terms of ROA, ROE and ROIC financial ratios is very important. Whitehaven Coal has improved all of the mentioned ratios over the past one year. The ROA jumped from -0.02 in December 2021 to 0.75 in December 2022. The ROE improved to 1.11 from -0.03 over the past one year whereas ROIC improved from -0.15 to 0.64 for the same period.

What about profitability? Since September 2021, Whitehaven’s shown a consistent improvement in revenue, operating income and net income.

For the quarter ended Sept. 30, 2021 the firm reported revenue, operating income, and net income of $1.94 billion, $248 million and a loss of $326 million, respectively.

By the end of Dec. 31, 2022, those three metrics increased to $7.3 billion, $4.9 billion and $3.4 billion, respectively.

What also matters a lot is that Whitehaven Coal stock has a Piotroski F-Score of 9, which is the maximum one a stock can get. A very high score like this is very bullish for the future performance of the stock.

Higher Yield, EPS

The stock has a dividend yield of 10.37% (ranked 557 out of 10,970) and a Dividend Score of 89.48 (ranked 212 out of 9,523). The Dividend Score is the result of a quantitative model that identifies companies with the highest dividend yield and growth. The number ranges from 0 to 100, with higher numbers indicating a more attractive dividend, and 50 being average.

The company has been reporting consitently higher earnings per share, something that investors should consider as a catalyst for potential higher stock prices. When earnings and revenues beat expectations, there are high chances of a stock moving to much higher price levels.

The GAAP EPS Basic (TTM) for the period ending on Dec. 31, 2022 was $3.62 compared to a loss of $0.11 one year ago.

Upside Potential

With the attractive dividend and momentum in sales and profitability, Whitehaven Coal stock looks like a buy now. Analysts are bullish on the stock price with a hefty upside of nearly 44%.

The WHC stock price could reach $9.94 by April 6, 2024, offering upside potential of 43.25%.

The forecasts range from a low of $8.08 to a high of $15.75. Keep an eye on this Energy stock as it now has a very attractive mix of Quality and Value.

This article originally appeared on Fintel

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