The coal industry has faced several challenges recently and continues to face issues ranging from government regulations to competition from other energy sources, etc. However, that doesn't mean that the entire industry should be ignored as an investment opportunity. I feel that Alliance Resource Partners LP (NASDAQ:ARLP) is a stock that long term investors should be looking at as a potential buy. In determining why I find Alliance Resource Partners an attractive stock, I will be looking at the company's financial performance, current valuation, recent trading activity, dividend policy, earnings and future outlook while comparing those areas to a few of Alliance Resource Partners' competitors.
Alliance Resource Partners is a large and diversified producer of coal that markets mainly to utilities and industrial users throughout the United States. The company operates underground mining activities throughout states such as Illinois, Indiana, Kentucky, Maryland, and West Virginia. Alliance Resource Partners was founded in 1971 and is headquartered in Tulsa, Oklahoma.
|Gross Profit Margin (Quarterly)||33.32%|
|Profit Margin (Quarterly)||16.23%|
|Return on Assets (NYSE:TTM)||36.73%|
|Return on Equity||98.53%|
|Revenue (Quarterly YOY Growth)||5.04%|
Looking at the chart below, you can see that Alliance Resource Partners' revenue over the past five years compares favorable to several competitors in the coal industry such as Arch Coal (NYSE:ACI), Natural Resources Partners (NYSE:NRP), and Peabody Energy (NYSE:BTU).
When looking at gross profit, the difference between Alliance Resource Partners and its competitors is even more impressive. While Arch Coal and Peabody Energy have seen gross profit drop 30% and 25% respectively, Alliance Resource Partners has seen a significant increase in gross profit over the same time period.
Current Valuation and Trading Activity
Alliance Resource Partners is currently trading at $76.18, which is $2.81 lower than its 52-week high and $17.63 higher than its 52-week low. It is trading above both its 50-day moving average of $74.60 and its 200-day moving average of $74.80.
Alliance Resource Partners has a current PE ratio of 10.43x and a price to book value of 3.56x.
Alliance Resource Partners LP has seen the following price returns:
|1 Month Price Return||4.33%|
|Year to Date Price Return||31.21%|
|1 Year Price Return||31.14%|
|3 Year Price Return||18.37%|
Compared to Arch Coal, Peabody Energy, and Natural Resources Partners, Alliance Resource Partners has performed exceptionally well over the past five years.
When seeing returns like this, I like to look at the history of a company's PE ratio to see if it is currently overvalued. Looking at the chart below, I feel that based on historic pricing, the stock remains at an attractive price even with the significant gains made this year.
Alliance Resource Partners currently pays a $1.175 quarterly dividend that yields just over 6%.
You can see that its yield compares well to its competitors with only NRP currently yielding a higher dividend.
With a payout ratio under 50%, the dividend remains safe with room for it to continue growing (at an expectantly slow pace).
While last quarter's earnings were not that impressive at $1.50 per share (compared to $1.54 for the same period last year), Alliance Resource Partners has seen a fairly steady and significant increase in earnings over the past several years. This is especially impressive when compared to the earnings performance of the three competitors of Arch Coal, Peabody Energy, and Natural Resources Partners.
The future looks fairly bright for Alliance Resource Partners compared to several of its competitors. In its latest quarterly report, the company expects to see continued growth next year as production at Tunnel Ridge is set to increase along with the initial production of the new Gibson South mine scheduled to begin later in the year. ARLP already has 32.6 million tons of coal priced and committed for next year along with commitments for 26.6 million and 20.5 million tons in 2015 and 2016.
I feel that Alliance Resource Partners is an excellent stock to consider buying for long term investors who prefer solid dividend yields. The company has a strong history of paying a dividend that consistently yields between 4% and 10% and the dividend remains safe. Alliance Resource Partners is already fully priced and contracted for 2014 with large percentages of 2015 and 2016 priced and contracted as well. Because of the regions it primarily operates in (Midwest and Appalachia) it can limit the degree to which natural gas negatively impacts the company.
Because of the industry it operates in, investors should always keep an eye on any type of new government regulations or involvement, but for the foreseeable future I see no reason why Alliance Resource Partners won't continue to reward long term investors with solid price returns and a hefty dividend that has grown steadily over the past five years plus. As always, I recommend individual investors perform their own research before making any investment decisions.