The coal industry has suffered a decrease in demand in the last few years due to the displacement of coal by natural gas in the power generation sector. The price of natural gas has fallen sharply since 2009, which caused using more natural gas to generate electricity, since burning natural gas produces nearly half as much carbon dioxide per unit of energy compared with coal. The challenging market conditions have even brought Peabody Energy (BTU), the world's largest private-sector coal company to announce that it may have to file for Chapter 11 bankruptcy protection.
However, Alliance Resource Partners LP (NASDAQ:ARLP), has continued to deliver profits and solid cash flows in one of the most challenging years in the history of the coal industry. ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. ARLP, the nation's first publicly traded master limited partnership involved in the production and marketing of coal, is currently the second largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. According to the company, despite expectations for lower production and sales volumes in the near term, ARLP's low-cost, strategically located operations and its ongoing cost reduction and efficiency efforts should help it to navigate these challenging times.
As I see it, ARLP's stock is very attractive right now due to the generous dividend payment. On January 26, the company approved a cash distribution to unitholders of $0.675 per unit, an annualized rate of $2.70 per unit. The distribution represents a 3.8% increase over the cash distribution of $0.65 per unit for the last quarter of 2014. The forward annual distribution yield is extremely high at 23.56%, and ARLP expects 2016 distributable cash flow to cover its current unitholder distribution by 1.1 to 1.2 times. As such, I believe that the current distribution rate is sustainable, at least for the year. The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. The annual rate of dividend growth over the past three years was at 8.6%, over the past five years was at 10.7%, and over the last ten years pretty high at 12.9%.
ARLP Dividend data by YCharts
ARLP Dividend Yield (TTM) data by YCharts
Year-to-date, ARLP's stock is down 15% while the S&P 500 index has decreased 0.3%, and the Nasdaq Composite Index has lost 4.8%. Moreover, since the beginning of 2012, ARLP has lost 69.7%. In this period, the S&P 500 Index has increased 62%, and the Nasdaq Composite Index has risen 83%. Nevertheless, considering its compelling valuation the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price.
ARLP Daily Chart
ARLP Weekly Chart
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On January 26, Alliance reported fourth quarter and full year 2015 financial results, which missed EPS expectations by $0.04 (5.3%). The company missed estimates also in its previous three quarters, as shown in the table below.
Source: Yahoo Finance
Revenues for the year 2015 decreased to $2.27 billion, a decline of 1.2% compared to the year ended December 31, 2014, as a 3.5% decrease in coal sales prices offset record coal sales volumes. Lower revenues and the net $77.6 million impact in 2015 of non-cash items led to reduced EBITDA to $670.0 million, a decrease of 16.7% compared to 2014. These factors also drove ARLP's net income lower by 38.4% in 2015 to $306.2 million, or $2.11 per basic and diluted limited partner unit. Excluding these non-cash items adjusted EBITDA for 2015 was $747.2 million and adjusted net income was $383.8 million, a decrease of 7.0% and 22.8%, respectively, compared to 2014.
In the report, Joseph W. Craft III, President and Chief Executive Officer, said:
During 2015, ARLP maintained its position as a leader in the coal industry. Our operations and marketing teams produced and sold record volumes leading ARLP to deliver profits and solid cash flows in what was arguably one of the most challenging years in the history of our industry. Faced with weak power demand, persistently low natural gas prices, ongoing regulatory pressures and an oversupplied coal market, we were able to achieve these results relying on ARLP's long-term sales agreements and our ability to reduce operating expenses and capital expenditures. In response to lower demand and unsustainably low spot coal pricing, we adjusted ARLP's operating portfolio and shuttered certain higher-cost operations, which led to non-cash impairments that reduced our financial results for the 2015 Quarter and Year.
According to the company, conditions in the U.S. thermal coal markets continued to deteriorate during the last quarter as mild weather reduced overall power demand. Utilities responded by deferring contracted tons and adding to their already above normal coal stockpiles. As such, ARLP believes that 2016 coal demand for its Illinois Basin and Northern Appalachia markets will be 6% to 7% below 2015, depending on the weather. The company said that it is uncertain as to whether utilities will satisfy this demand by reducing inventories or taking advantage of current low spot prices and purchase coal to match their coal burn.
Regarding its valuation metrics, ARLP's stock is considerably undervalued. The stock is trading way below book value, price to book is only 0.86, the trailing P/E is extremely low at 5.43, and the forward P/E is very low at 10.27. The price-to-sales ratio is very low at 0.37, and the price to free cash flow is exceptionally low at 5.44. Furthermore, the Enterprise Value/EBITDA ratio is very low at 2.21.
Moreover, ARLP's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below:
According to Portfolio123's "ValueRank" ranking system, ARLP's stock is ranked first among all 173 companies trading on U.S. markets and yielding more than 10%.
The "ValueRank" ranking system is quite complex, and it is taking into account many factors like; 5-years average yield, sales growth, trailing P/E, price to book, price to sales and return on equity, as shown in Portfolio123's chart below.
Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.
ARLP has continued to deliver profits and solid cash flows in one of the most challenging years in the history of the coal industry. According to the company, despite expectations for lower production and sales volumes in the near term, ARLP's low-cost, strategically located operations and its ongoing cost reduction and efficiency efforts should help it to navigate these challenging times. As I see it, ARLP's stock is very attractive right now due to the generous dividend payment. The forward annual distribution yield is extremely high at 23.56%, and ARLP expects 2016 distributable cash flow to cover its current unitholder distribution by 1.1 to 1.2 times. Regarding its valuation metrics, ARLP's stock is considerably undervalued. The stock is trading way below book value, price to book is only 0.86, the trailing P/E is extremely low at 5.43. In my opinion, the recent drop in its price creates an excellent opportunity to buy ARLP's stock at an attractive price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.