Coal has been one of the most unloved sectors over the past twelve months. Increasing competition from low natural gas prices and outright hostility from the current administration has made the sector toxic to investors. However, contrarian investors might want to stick their toes back into the water as several stocks are selling at historically low valuations. I prefer to play this space on the income side. One stock that has picked up several positive catalysts recently and also provides a 7% yield is Alliance Resource Partners (ARLP).
Key recent positives for ARLP:
- Goldman Sachs upgraded the stock to "Buy" this week with a $70 price target.
- Deutsche Bank also changed its rating on the shares from "Hold" to "Buy" this week.
- The stock crossed its 200-day moving average to begin the year.
Alliance Resource Partners, L.P. produces and markets coal primarily to utilities and industrial users in the United States. It operates 10 underground mining complexes in the Illinois Basin, Central Appalachian, and Northern Appalachian regions.
4 reasons ARLP is a good contrarian income pick up at under $63 a share:
- The company pays a 7% yield and has tripled its distribution payouts over the last eight years.
- Alliance has one of the best balance sheets and operating metrics within the industry. Production is 95% booked for 2013.
- ARLP is priced at the bottom of its five-year valuation range based on P/E, P/S, P/CF and P/S.
- Consensus earnings estimates for both FY2012 and FY2013 have improved over the last two months. In addition, revenue growth should accelerate to better than 12% in FY2013 from just under 10% in FY2012. ARLP is going for just over 9x forward earnings.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARLP over the next 72 hours.