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Crushing Earnings Estimates Is Business-as-Usual For This Coal Stock

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s no secret that the coal industry in the United States is under fire. A multitude of industry headwinds, including depressed natural gas prices and ongoing regulatory threats, have brought the entire sector to its knees.

Shares of coal producers, including Peabody Energy (NYSE: BTU) and Alpha Natural Resources (NYSE: ANR), have taken an absolute beating over the past few years. With all this going on, you’d be tempted to think the entire business model is in jeopardy, and to avoid all coal stocks entirely. However, it just so happens that there’s one coal stock that’s not only surviving the current environment, but thriving, and represents a fantastic buy.

The canary in the coal mine

Meet Alliance Resource Partners (NASDAQ: ARLP), the coal Master Limited Partnership that defies logic by crushing earnings estimates seemingly every quarter.

The $2 billion stock by market capitalization just did it again, this time reporting second-quarter revenues, coal sales volumes, and EBITDA that each set company records.

All told, revenues and increased 4.5% and 7.1% respectively, when compared to the same quarter one year ago.

Furthermore, the future remains extremely bright for Alliance Resource Partners. Along with its second-quarter report, the company upped its revenue, coal sales volume, and net income expectations for the remainder of the year. And, assuming customer deliveries occur as planned, Alliance Resource Partners is fully priced and contracted for its expected 2013 coal sales.

Alliance Resource Partner’s strong results and excellent outlook are in stark contrast to the widespread struggles facing other coal companies.

Peabody’s second-quarter revenue fell 13%, and its adjusted EBITDA collapsed by 44% versus the same quarter last year. Furthermore, the company’s adjusted diluted earnings per share have declined 80% through the first six months of the year.

Not surprisingly, Peabody’s deteriorating fundamentals have taken their toll on the stock. Shares of Peabody Energy have lost two-thirds of their value over the past three years.

Meanwhile, Alpha Natural was a $43 stock exactly three years ago, but has dropped nearly 90% in price since that time. The company’s fundamentals have deteriorated for many quarters in a row. Alpha Natural reported a second-quarter loss of $185 million, or $0.84 per share.

Alpha’s results were ugly across the board. Alpha’s margins collapsed and its volumes fell considerably. All told, in the most recent quarter, Alpha realized a margin of $2.72 per ton of coal it sold. That compares to a margin of $6.57 per ton in the same quarter last year.

Coal volumes sold fell a staggering 19%. All told, these factors combined to result in a 28% drop in quarterly revenue.

Not surprisingly, shares of Alpha Natural declined 8% intra-day after its earnings announcement.

The icing on Alliance Resource’s cake: a large (and growing) yield

Peabody at least pays its shareholders a dividend, which yields 2% at recent prices. On the subject of dividends, however, Alliance Resource Partners reigns supreme.

As previously mentioned, Alliance Resource Partners is an MLP, meaning it enjoys a favorable tax structure in exchange for distributing the vast majority of its earnings through to unitholders.

This is a huge win for both the company and its investors. And, making things even better, Alliance Resource Partners actually increases its dividend every quarter.

The company bumped up its distribution by 2% this quarter, and on a year-over-year basis, Alliance Resource Partner’s $4.61 per-unit distribution is 8.5% higher than it was this time last year.

The increased distribution represents the 21st consecutive quarterly bump up in a row. Alliance Resource’s new payout represents a 6.1% yield at recent prices for new investors.

Consider the future income made possible by a 6% yielding stock with 8.5% annualized dividend growth. I’ve owned Alliance Resource Partners and have written several times about the company, recommending it for all investors. In the time I have owned units, my cost basis is down to $54.56 per share due to a low entry price and reinvestment of those fat distributions. With the new annualized payout of $4.61 per unit, my yield on cost is all the way up to 8.5%.

Foolish investors with a long time horizon can reap huge future rewards with Alliance Resource Partners. The stock is quite simply a great buy.

Robert Ciura 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!

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