An 8% Yield You Can Count On
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
How many times have you seen a company that can already predict its sales for the next four years? What if I also told you this same company yields nearly 8%, and that yield is virtually guaranteed to rise each quarter? This is the opportunity being presented to investors in Alliance Resource Partnership (NASDAQ: ARLP). I've written about this company before calling it possibly the perfect stock. Not only does Alliance have an impressive history of revenue and earnings growth, but they are also expected to continue this streak. What is equally impressive is this partnership increases its dividend usually once per quarter, and recently extended this streak to 18 consecutive quarters. The only reason this stock doesn't get more attention is Alliance operates in the coal industry.
Economics 101 – Coal and Natural Gas Pricing:
Unfortunately there are some investors that have already stopped reading. So much has been made of the decline in the coal industry that you might think this is a permanent issue. Companies like Alliance are being sold because of the industry they operate in as opposed to their actual results. Other companies like Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) have been crushed over the last year, losing between 30% and 50%. One big difference between these two competitors and Alliance has been their dividend yields. Even before Arch had to cut its payout, the company couldn't compete with the near 6% or better yield that Alliance has been paying. With both companies paying yields of below 2% today, versus nearly 8% at Alliance, there is much less floor under these competitors stocks. There are really some pretty simple economic factors at work in the industry. The short version is as natural gas prices fell, companies were less inclined to use coal. However, one thing that everyone knows from Economics 101 is, as prices fall there is less reason for companies to continue to develop the resource at the same rate. Think about it, if someone said you can sell 100 pounds of material for $5 per pound, or you can sell 200 pounds for $2.50, which would you rather do? Obviously you would rather deal with less material and sell it for the higher price. It is less work and you still have the same in sales. This is essentially what has happened to the price of natural gas as the price has roughly doubled off its lows. In addition, international demand for coal is still strong, and this is helping coal companies wait out the imbalance in the domestic market.
Assuming Coal Isn't Dead – ARLP Could Be The Best Value:
If you look at Alliance's recent earnings, most of the numbers are encouraging, if you account for a one-time issue at the company's Ponitiki mine. Unfortunately for the company, this one mine required an unplanned idling during the quarter which hurt results. However, the company expects the repairs to be completed by the end of the year at which point production can resume. Primarily due to this issue, Alliance's EBITDA was down 4% year-over-year. Even with this challenge, the company saw coal sales increase by 5.3% on a volume increase of 7%. The increase in sales was driven by a huge improvement at the company's Tunnel Ridge mine, which delivered 764,000 tons versus under 260,000 tons in the prior quarter. While the projects are not up and running yet, the company also reported that its Gibson South and White Oak projects are moving forward according to plan. What really makes Alliance different than companies in other industries is the company's sales are often contracted years ahead of time. The company continued this trend by adding another 1.65 million tons for delivery through 2014. This is good news for investors as Alliance regularly updates its contracted sales for multiple years.
Four Years Of Sales Already Contracted:
What is really amazing is how easy it is for investors to know what Alliance will sell for multiple years from now. For 2012, the company updated its guidance to 34.4 to 34.9 million tons. While this was slightly less than prior guidance, 2013 looks like a very good year. Alliance reports that next year's contracted sales are for 37.1 million tons, which would represent an increase of at least 6.3% over this year. The fact that “over 95% of these volumes are priced” already should give investors great confidence in next year's results. Even more impressive is the company can also say that for 2014 they have almost 30 million tons contracted, and for 2015 they have almost 23 million tons contracted. As you can see, Alliance is set up not only for a good year in 2013, but they already have a great start on the next two years after that. The argument for continued strength in the industry comes from industry research and the company's own CEO. Joseph Craft said, “we expect U.S. steam coal demand will grow in 2013 removing the current inventory overhang and setting the stage for higher coal prices in the second half of 2013.” If you want yet another reason to choose Alliance, consider that the company appears to be one of the most efficient operators in the industry as well.
Higher Gross Margin And Better Cash Flow Puts Alliance In A Class By Itself:
When it comes right down to it, coal is a commodity product meaning it doesn't matter if its coal from point A or point B, the quantity and competitive pricing determines the amount of money a company can make. This is why the company with the highest gross margin should be the most effective competitor. Looking at Alliance's quarterly results we see a gross margin of 33.79%. By comparison, Peabody comes in at 26.70% and Arch shows a gross margin of just over 17% in their results. A higher gross margin in theory means more money towards development. In addition, Alliance reported operating cash flow down just 0.16%. While this might not sound good on the surface, this is significantly better than their competition. Over the last year, Peabody's operating cash flow has been cut almost in half, and Arch has seen their cash flow decline by more than 70% in the last four quarters.
It seems like by multiple measures Alliance could be the best value for investors, but what sets the company apart is its distribution. Alliance recently increased its distribution for the 18th consecutive quarter with a 2.1% increase from the prior quarter. The company also said that next year's strong pipeline of sales should allow this streak to continue. With a recent drop in the stock price, Alliance now offers investors a yield of 7.91%. With shares trading at under 9 times next year's earnings, the stock looks cheap as well. If you are an investor interested in growth and income, Alliance looks like a stock you can count on.
MHenage owns shares of Alliance Resource Partners, 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.