Alliance Resource Partners Earnings – Behind The Headlines
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I've called Alliance Resource Partners (NASDAQ: ARLP) the perfect stock in a post before. In that post I asked for a yield of at least 3%, past earnings growth of 20%, and at least 15% past revenue growth. I found that not only did Alliance meet these criteria, but the company's yield and dividend increases, trumped the two other companies I found. While the company did miss on EPS in their last earnings report, I think the market is missing the bigger picture. Let me show you what is going on with Alliance behind the headline EPS miss.
First the headline numbers, total revenues were up 4.8% and EPS came in at $1.54 versus estimates of $1.60 per share. This EPS miss caused analysts to cut their projections for both full year 2012 and 2013 by 9% and 8% respectively. When you compare this miss of about 4%, to the miss at Arch Coal (NYSE: ACI) of 125% in the same quarter, things don't look quite as bad. Now granted it does look like the company will post a much slower growth year than in years past, but that is largely due to investments in the future. The company is working on several projects that are driving up expenses in the short-term. The good news is, these investments will contribute significantly to production and thus profits in the long-term. You can tell that management is confident in their future growth, as the company increased the distribution to unit holders by 3.5% for the 16th consecutive quarter. Again using Arch Coal as a comparison, a 3.5% quarterly increase probably sounds pretty good compared to Arch's nearly 73% cut in that company's dividend.
So what has Alliance been up to that's causing expenses to jump and hurt profits? There are three different projects underway. First, the company is constructing or expanding two different existing mines. Specifically, Tunnel Ridge is being developed and the company expects to double production in the next two years. The most significant driver of costs is the company's agreement with White Oak Resources. This agreement isn't expected to begin to contribute to production until about 2013. However, once this mine is fully operational, Alliance expects this could add as much as 5-10 million tons to the company's coal sales, beginning in 2014 and after. Alliance gets preferential return on their investment. In the short-term, this means Alliance has to show the start-up losses. Over time, the company will receive royalty income and coal processing fee income from this agreement. This should help Alliance show a big jump in EBITDA beginning in 2014 because of this additional income and production.
2012 Outlook and Beyond:
Even with the increased costs of developing two mines, and starting up the White Oak agreement, the company still expects to turn in record results for the full year. Management is projecting 14-18% higher coal production, and 11-15% higher sales. The company also expects revenues to come in 14-17% higher than prior year. The expense of these future investments will take a bite out of results, specifically EBITDA is expected to be up just 2.5% - 7.7%. One truly amazing comment in the most recent report was the company's backlog of orders. The company said they already have sales commitments for 34.6 million tons of coal in 2013, 28.8 million in 2014, and 21.5 million in 2015. It's pretty amazing that Alliance already has sales commitments for next year that equal 96% of their expected sales for 2012. I'm sure this is why analysts are already calling for at least a 13% jump in revenues next year.
There are other opportunities in the coal industry, but I think Alliance is the ultimate play. For instance, I like the opportunity I see in another coal operator Peabody Energy (NYSE: BTU) as that stock flirts with a 52 week low. Peabody is expected to grow at about 10% to Alliance's 7% expected growth rate. The huge difference is the respective dividend yields. Peabody Energy pays a current yield of about 1.46% versus Alliance pays a distribution of 7.22%. I've only seen Alliance's yield get above 7% once or twice before since I've watched the company. In prior cases the stock staged a strong rally from that point. With a sustainable 7%+ yield, and the company investing for bigger future growth, it seems like Alliance Resource Partners is the perfect stock after all.
MHenage owns shares of Peabody Energy and Alliance Resource Parters, L.P.. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.