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Alliance Holding GP L.P. (NASDAQ:AHGP) looks like a company that’s ready to set off some fireworks again. The company’s financials are strong as steel and the operating margins are thick. The engine under this company’s hood is a beast. As well, we understand that the firm has made a strong run since the bottom in 2009 but it’s slid back a good deal since it peaked in late March 2011. In our view, all that did was create a buying opportunity for investors.

What we really care about though are big catalysts when it comes to a company like AHGP. The type of catalyst that will push the company’s stock into a new rally with legs. Based on our analysis of the global coal market, we feel that there should a strong and unexpected increase in the demand for coal moving forward. For this reason we feel that AHGP is a BUY given that it holds strong fundamentals and a secret monster catalyst to drive this stock higher.

The Fundamentals Are Built of Steel

The first thing we always check out on any firm is the balance sheet. Perhaps it’s a creature of habit but before actually putting in some real time we look to see what a company has going for it in order to make sure it’s not a boat full of holes.

The firm has a quick ratio of 2.83 and a current ratio of 3.24, which is spectacular. In addition, we checked out the components of these liquidity ratios by reviewing the cash conversion cycle and found everything still looked good. The cash flow statement illustrated that the firm has no issue servicing its debt or generating free cash flow.

Liquidity Trends:

Year20092010Latest Quarter
Current Ratio1.413.263.24
Quick Ratio.862.962.84

When reviewing the profitability of the firm everything looked to be in good order. The firm works with an operating margin of 22.31% (TTM), net margin of 11.19% (TTM), and an ROA of 13.69% (TTM).

Profitability Trends:

Year20092010TTM
Operating Margin

17.83%

21.62%

22.31%

Net Margin

9.28%

10.83%

11.19%

ROA

10.95%

13.63%

13.69%

In terms of year over year top line improvements, we saw that quarterly revenue growth was 11.2% and quarterly earnings growth was 25.5%. This firm has a clean bill of health in our view and that means we can now focus on the exciting catalyst we told you about earlier.

Unexpected Increase in Coal Demand

The investment community may not have put all the dots together yet but it looks like demand for coal is about to explode. The reason in part has to do with the unfortunate nuclear power plant incident in Japan. Whether people realize it or not, that one event has set off a global domino affect in relation to the domestic energy policy of top coal users. The net affect should be a decent gap in the relationship between demand and supply of coal moving forward.

Reason 1:The Chinese Variable

China has stopped the construction of its nuclear reactors, and put them under review and re-inspection in light of the nuclear disaster that occurred in Japan. Now that these nuclear power plants will be delayed in terms of completion, the country must face and plan for new energy demand contingencies. Given that China is already the world’s largest consumer of coal and has a large amount of coal power plants available we believe that the quick fix for them will be to place an even heavier reliance on coal power.

Reason 2:The German Variable

We know that Germany has renounced nuclear power and will soon decommission its remaining power plants. What people may not realize is that Germany is actually the largest consumer of coal in Europe. Since nuclear power is one of the cheapest forms of energy and we doubt that the population of Germany wants to see its energy bills skyrocket, German demand for coal will only pick up. The only immediate alternative would be oil, and given current prices along with other geopolitical variables we feel that Germany would prefer coal to oil. Some might argue that Germany will push harder for clean energy, but we don’t see any current technology that can immediately or fully offset the energy supply that the nuclear power plants supply.

Reason 3:The American and Japanese Variables

America and Japan are respectively the second and seventh largest consumers of coal in the world. For Japan, we know the prospect of nuclear power is pretty much a mute point for the time being. This means it will most likely have to start heavily importing coal as it attempts to break out of its current economic contraction. In terms of the US, even if we see a continued weak recovery, demand should continue to increase. The takeaway point is that the 1st, 2nd, 5th, and 7th largest consumers of coal in the world also happen to hold some of the largest economies in the world and we don’t see any way where they won’t be demanding more coal.

RankCountry

Billion Short Tons

1China

1,310,000,000

2USA

1,060,000,000

3India

339,000,000

4Russia

298,000,000

5Germany

265,000,000

6South Africa

170,500,000

7Japan

149,500,000

*Source: Energy Information Administration, US Department of Energy

Conclusion:

AHGP stands to benefit greatly from this future catalyst that we have identified in relation to the unexpected global demand for coal. The firm provides a decent size dividend as well, which we like. When people start to see this increased global demand start to really pick up, the stock should fly and this is why we rate it a BUY.

Source: 3 Reasons Alliance Holding Will Rocket Higher With Unexpected Coal Demand