Still The Best In Its Industry
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One thing I've learned in over 20 years of investing is people are stubborn. Certain industries are written off for dead, and many good stocks go unnoticed because of this. Other investors stop paying attention when they realize the author owns the shares. However, I'm begging you to stick with me on this one. I'm here to tell you about Alliance Resource Partners (NASDAQ: ARLP).
Record Results And A High Yield
My investment thesis here is really simple. Alliance pays a current yield of 6.94%. What's equally as important is, the company raises this distribution each quarter, and has been doing so for several years. The stock sells for about 10 times projected earnings, and they have contracted more sales for 2013 than they had for 2012. The company is no flash in the pan either, considering they just reported the “12th consecutive year of record financial results.”
So what's the problem? To be honest, Alliance operates as a coal partnership. For those of you who are still reading, this is a coal company the likes of which I haven't found an equal. If you look at their financials and projected growth, it's hard for me to make an argument to buy another stock in this industry.
What Makes This Company Different?
Since yield is the most obvious attraction to the stock, let's look at some other options. Investors could buy Peabody Energy (NYSE: BTU) or Arch Coal (NYSE: ACI), and get yields of 1.36% and 1.7% respectively. Both companies are pure plays on the coal industry, but given the choice between a near 7% yield and less than 2%, this is a no contest. An even larger player in the natural resources field is BHP Billiton (NYSE: BHP), but even this mega-cap's yield of 2.87% doesn't come close to Alliance.
Another way to compare Alliance to their peers is by looking at their operating margin. A company with a higher margin either has pricing power, is a more efficient operator, or both. In either case, a company with a higher margin should be more protected from challenges in the future. Alliance reported an operating margin of 19.42%, which increased from last year's margin of 18.39%. By comparison, Peabody's operating margin was 13.16% last quarter, and Arch Coal's margin came in at 12.5%. Though BHP does have a higher margin at 32.54%, this is because of the company's diverse operations that span into precious metals and other industries besides coal.
If investors need a third reason that Alliance is different from its competition, look at what analysts are calling for in revenue growth over the next few years. In theory, solid revenue growth makes bottom line growth easier to achieve. In the next two years, analysts expect average revenue growth of 8.3% at Alliance. Considering that Peabody and BHP are expected to report about 5.5% revenue growth, and Arch Coal is expected to see negative revenue growth, you can see why Alliance may do better than its competition.
One of The Few Companies That Can Predict Its Sales For Multiple Years
Nothing is more reassuring than a company predicting sales for multiple years. Most of Alliance's sales are contracted ahead of time, so this is more than just the company trying to make investors feel good. This last quarter, the company reported revenue up 15.8% and coal sales volumes up 19.8%.
For 2013, Alliance already has contracted 38.1 to 39.1 million tonnes of coal. Investors can track the company's progress fairly easily as well, since in November of 2012 this figure stood at 37.1 million. Alliance is also reporting 30.7 million tonnes contracted for 2014 (up from 30 million a month or so ago). When was the last time you owned a stock that could confidently tell you they would have sales of at least a certain amount two years from now?
Risk Vs Reward
Alliance's risks primarily relate to their investments for future growth. The company is spending money to develop a mine called Gibson South. They have also invested in White Oak, which is a partnership that should add significant coal production in the next few years. Both of these projects require cash to fund until they are operational. This helps explain why the company's free cash flow payout ratio can stray over 100% from time to time. In addition, Alliance has strung together many quarters of consecutive dividend increases. If the company were to break this string, it might be a sign of trouble.
However, Alliance's risks also offer investors huge reward. The company's two big projects also offer future growth in production, which will be needed to meet what appears to be strong future demand. In addition, the company's string of dividend increases is a main attraction to the stock. With a near 7% yield, what is better than knowing the yield will climb again in just three months? With shares trading at just over 10 times projected earnings, the stock seems reasonably priced, and just might be the perfect stock for income seeking investors.
MHenage owns shares of Alliance Resource Partners, L.P.. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!