Hook / Thesis
Warrior Met Coal (HCC) is showing the textbook signature of a capital-intensive growth phase: operating cash flow is improving materially quarter-to-quarter while investing cash flow is deeply negative. That combination typically means the company is spending ahead of production gains - think development and sustaining capital at an expansion like Blue Creek - and once that spending levels off the enterprise begins to convert those higher operating earnings into free cash flow. The plan here: take a tactical long on HCC at current levels or on modest pullback, size for volatility, and use a tight stop to protect against commodity or execution risk.
Why the market should care
HCC sells high-quality metallurgical coal to steelmakers overseas, so revenue and margin swings track commodity cycles and mine production. The recent quarterly filings show sequential operational improvement despite the company spending heavily on investing activities. If capex is indeed tracking toward completion, the market could re-rate HCC as incremental cash flow drops to the bottom line.
Business snapshot (from filings)
- Q3 FY2025 (period ended 09/30/2025) revenue: $328.6M; gross profit: $89.1M; net income: $36.6M; diluted EPS: $0.70.
- Quarterly cash flows show the sequence I care about: net cash from operating activities in Q3 FY2025 was $104.694M, up from $37.546M in Q2 and $10.917M in Q1.
- Investing cash flow has been a headwind: Q3 FY2025 investing outflows were -$133.829M, Q2 was -$94.332M, and Q1 was -$77.765M. That points to material capital spending that should eventually translate into higher production or lower unit costs.
- Balance sheet leverage is low: long-term debt at Q3 FY2025 is $154.087M while current assets stand at $802.028M and equity attributable to parent is ~$2.118B.
- Dividends are in place: the board has continued a quarterly cash dividend of $0.08 per share (latest declaration 10/28/2025 pay date 11/14/2025), implying an annual run‑rate payout of $0.32 per share (roughly 0.35% yield at today's ~$91.6 price).
How the numbers support the thesis
The key sequence is clear in the three most recent quarters: operating cash flow accelerated from $10.9M (Q1) to $37.5M (Q2) to $104.7M (Q3), while investing outflows deepened from ~$78M to ~$94M to ~$134M. That pattern is exactly what you expect when a company is rolling capex to build or expand production: operating performance improves as mines ramp, but free cash is negative until capital spending tails off. Against that backdrop, HCC's modest debt load and >$2.1B equity base give it flexibility to complete projects without balance-sheet stress.
Valuation framing
The dataset doesn't include an explicit market cap figure, so I focus on price dynamics and earnings/cash flow context. The market price is trading around the low-mid $90s (last trade ~$91.58, prior close $90.09). Using the most recent quarter's diluted EPS of $0.70 as a waypoint produces an approximate simple annualization (4x Q3 EPS) of ~$2.80 — at $91.6 that implies a crude P/E near ~33x. That calculation is only illustrative and sensitive to quarter-to-quarter volatility; the company has shown much higher and lower quarterly earnings in prior years. A more relevant sanity check for re-rating is cash-generation: Q3 operating cash flow of $104.7M implies a strong ability to cover the current long-term debt of $154.1M if that level persists or improves as capex finishes.
Qualitatively, if investing cash flow begins to normalize (less negative) while operating cash flow stays elevated, free cash flow will grow and the market should look past near-term capex drags toward sustainably higher FCF. That re-rating could justify a higher multiple than the currently implied P/E, especially given the company's low leverage.
Trade idea (actionable)
Directional view: Long HCC (swing)
- Entry: 86.00 - 92.50. You can initiate a full position at or below 91.6; prefer scaling in on weakness toward 86.00 where reward/risk improves.
- Stop-loss: 77.50. A close below this level (~10% below the low end of the entry zone) flags that the market isn't digesting the capex-to-cash flow story and that either commodity weakness or execution issues are in play.
- Targets:
- Near-term target: 110.00 (first profit-taking zone; aligns with recent multi-month highs and gives ~20-25% upside from the entry midpoint).
- Stretch target: 140.00 (if operating cash flow continues to expand and investing outflows decline, the stock can re-rate materially — this is the upside case to hold into a re-rating event).
- Position sizing: Keep position to a size that a ~10% drawdown to the stop represents acceptable pain — this is a cyclically exposed, volatile name.
Catalysts to watch (2–5)
- Quarterly operating cash flow trend - continued sequential gains signal the ramp is real (Q3 filed 11/05/2025 showed $104.694M).
- Reduction in negative investing cash flow - if the company reports a meaningful drop in capex that should directly lift free cash flow.
- Any operational update quantifying incremental production or unit-cost improvements at the development project(s) in the filings or press releases.
- Macro demand signs from steelmaking regions (Europe/Asia) and metallurgical coal pricing, which will determine revenue and margin power.
Risks and counterarguments
- Commodity price risk: Metallurgical coal prices can be volatile; a downturn would compress revenue and could reverse the earnings trajectory even if the company completes capex.
- Execution / capex overrun risk: The company is spending heavily on investing activities (Q3 investing -$133.829M). If spending extends or costs overshoot, the path to positive free cash flow lengthens and the valuation case weakens.
- Insider signal & governance: Recent news shows the CEO sold shares worth $10M (reported 01/19/2026). Insider sales are not proof of a problem, but they increase headline risk and can weigh on sentiment during a delicate re-rating window.
- Dividend sustainability: The quarterly cash dividend (latest $0.08) is relatively small vs. cash flows, but a severe cash flow reversal could force management to cut or reduce the payout, which would be a negative catalyst.
- Counterargument: One could argue the market already prices in the capex and any incremental production will be offset by weaker global demand or higher operating costs (labor, logistics). If operating cash flow reverses or investing outflows stay high, the share price can decline — the stop at 77.50 protects against that scenario.
Conclusion and what would change my mind
My base case: HCC is a tactical buy on the view that heavy investing is near its peak and that the sequential rise in operating cash flow will translate into stronger free cash flow when capex normalizes. The balance sheet is supportive — long-term debt (~$154M) is modest relative to the company’s recent quarterly cash generation (~$104.7M in Q3) and equity base (~$2.118B). The trade is a medium-term swing: enter in the 86–92.5 area, stop at 77.5, take profits at 110, and consider the 140 zone if the operating/capex story accelerates.
I would change my view if:
- Operating cash flow falls materially in the next two quarters or investing outflows accelerate further, signaling deeper or longer capex than expected.
- There are operational setbacks reported in filings (production shortfalls, safety shutdowns) or sustained weakness in metallurgical coal demand/pricing that undercuts revenue.
- Management abandons the dividend without a clear capital-allocation plan to enhance long-term cash returns.
For further reading, see the company filing for Q3 FY2025 (accepted 11/05/2025): source filing.
Disclosure: This is a trade idea, not investment advice. Position sizing, timing, and risk controls depend on your personal financial situation and risk tolerance.