2023-11-08 03:23:38 ET
Summary
- ARLP is among the largest coal miners in the US. It has mines in Illinois and Appalachia. The company produces thermal and metallurgical coal primarily for US customers.
- What I like about ARLP is the high percentage of insider ownership and managers' long history with the company. The company's top three executives own 16.5% of the shares.
- The company trades below its historical EV/Sales and EV/EBITDA peaks. Ranked against US energy stocks and the US broad equity market, ARLP stock is cheaper, being in the lower percentiles.
- ARLP is among the best in class, with an 11.6% dividend yield and 3.0 EV/EBITDA. The company deserves a buy rating due to its qualities.
Introduction
The pundits say investing in coal is not politically correct. However, coal miners are among the best-kept secrets. I have written an article on Australian coal miner Whitehaven (WHITF). Today, I analyze Alliance Resource Partners (ARLP).
ARLP is a solid coal miner with a high percentage of insider ownership and pays dividends with double-digit yields. The company has oil and gas royalties and investments in new alternative energy businesses. ARLP is discounted compared to its past multiples but dearer than its American peers like CONSOL Energy (CEIX) and Peabody (BTU). In my opinion, ARLP is an excellent addition to any income-oriented portfolio with an accent on energy stocks. My verdict is a buy rating.
ARLP Business
ARLP is the second largest coal miner in the eastern US and fifth in the entire US. Its operations are in the Illinois Basin and Appalachia. The image below from the last presentation shows ARLP's mines.
Illinois basin assets contribute 68% to the company's revenue. In 2022, they produced 24.1 Mt of coal. Appalachia operations deliver 32% of the revenue, and in 2022, they produced 11.5 Mt of coal. The flagship assets are Tunnel Ridge and River View. In 2022, 8.3 and 10.2 million tons of coal. Both combined delivered 52% of the company's coal output.
The company produces thermal and metallurgical coal primarily for US customers. Domestic utilities buy 15% of its output, while 15% is exported. The chart below shows the company's ARLP customers.
ARLP has made successful royalty investments. They represent 5.9% of total sales. The image below shows the company's royalty assets.
They are in Permian (53%), Adanarko (35%) and Williston (7%). The royalty segment delivered a $131 million adjusted EBITDA and adjusted EBITDA margin of 93% in 2022. The total proved reserves are 20,596 MBOE. Royalty investments provide excellent upside potential with rising oil prices with capped downside risk due to low initial investments. ARLP started its royalty business in 2014. Since then, the company cumulatively invested $705 million and generated a cumulative adjusted EBITDA of $415 million.
Apart from the royalties, ARLP invests in Ascend Element Ltd and Infinitum . The former is a manufacturer and recycler of battery metals. ARLP participates with $25 million in Series D funding. The Department of Energy awarded Ascend a $ 480 million grant to develop the first battery recycling facility in the US. Infinitum is a Texan company manufacturing electrical motors. ARLP has $67 million invested in Infinitum. Those funds are part of a Series E equity raise. Apart from Infinitum and Ascend, ARLP owns Matrix Design Group . The company develops safety devices for heavy industry.
What I like about ARLP is the high percentage of insider ownership. The table below shows who are the major shareholders of the company.
Joseph Craft is ARLP's CEO, Thomas Wynne is the COO, and Cary Marshall is the CFO. Kathleen Kraft is the daughter of Mr. Craft. Together they own 16.5% of the company's shares. Apart from that, they have been with us for more than two decades. Having ownership and a long history with the company builds trust with shareholders.
Fundamental Analysis
As I said in the introduction, coal companies are hidden gems. They have deleveraged balance sheets, realize high returns on capital, and pay dividends with double-digit yields lest they start analyzing ARLP financials.
Liquidity and solvency
The company gradually reduces its debt levels. The chart below shows ARLP's debt and interest coverage.
Even in a challenging year such as 2020, the company maintained adequate liquidity. Since it was successfully delivered, it has reached 34.2% Total liabilities/Total assets and 16.8% Total debt/Capital. Interest coverage is more than adequate (EBITDA - CAPEX)/Interest Expense is 16.8.
ARLP has $197 million cash and $374 million total debt. The company has the lowest cash-to-debt ratio compared to Peabody, CONSOL, and Whitehaven. Its debt profile is shown below.
In 2023, a $23 million debt matures. Similar is the debt payment in 2024. In 2025, ARLP must repay $303 million in senior notes.
Profitability and efficiency
Like most coal miners, ARLP is a profitable enterprise. Margins and returns have improved yearly, as shown in the table below.
ARLP's gross margin is 42.2%, Peabody is 35.5% and Consol is 46.79%. Moving down the road, ARLP's EBITDA margin is 39.07%, Peabody is 32.8%, and Consol is 43.6%. All three maintain high returns on capital above 20%.
In the last quarter , ARLP total revenue increased to $636.5 million compared to 3Q22. One of the reasons is the higher realized sales price. The royalty segment has achieved impressive results with 28% growth YoY. Despite that, the company's net profit shrunk to $153 million from $167 million in 3Q22. The primary reason is the growing labor costs. The company has 3371 employees.
The graph below compares ARLP and its peers using Total capital/Total debt and ROIC. The idea is to assess management skills in capital allocation.
ARLP management does a good job compared to its group. The company holds third place next to Consol and Peabody, with 16.8% total debt/total capital and 22.8% ROIC.
Free cash flow yields of coal miners are staggering. Those companies are money printers. In the chart below, I compare ARLP with other coal majors using CAPEX/Revenue and FCF yield. The goal is to estimate how much spare cash the company has.
ARLP FCF yield is 19.5%, while CAPEX/Revenue is 14.22%. Such figures show the company's ability to generate excess cash. Peabody has the highest FCF yield but distributed dividends with a 0.68% yield. I prefer to get paid generously to wait. ARLP does precisely that, rewarding its shareholders with dividends.
Dividends
Investing in commodities is a risky affair. So, juicy dividends are a great incentive to accept that risk. Not all coal miners distribute dividends. However, ARLP is not among those. The company dividend ((TTM)) is $2.8 per share. The current stock price is 11.16% yield.
One of the ways to estimate a company's value is to compare dividend yield and EV/EBITDA. The image below shows the US and Australian coal mines' dividend yields and EV/EBITDA.
Peabody pays dividends with a mere 0.67% yield. Consol does not distribute dividends. The leader, Enviva, is a much smaller company than ARLP and operates in another consumable fuels segment (wooden pallets). Whitehaven pays dividends with an 11% yield. ARLP is the best in class, with an 11.6% dividend yield and 3.0 EV/EBITDA. Discussing bang for the buck, let's move to the next chapter, where we value ARLP against its historical multiples and the US energy sector.
Price vs Value
To estimate ARLP value, I use its historical EV/EBITDA and EV/Sales.
ARLP stock currently is trading at 3.0 EV/EBITDA and 1.2 EV/Sales. As seen in the chart above, those figures are near the company's five-year average (3.72 EV/EBITDA and 1.18 EV/Sales). However, those values are much lower than the peaks from 2014, 208, and 2022 (5.6 EV/EBITDA and 1.8 EV/Sales).
Let's see how ARLP performs against US energy stocks, the US broad equity market, and its ten-year history.
ARLP stock trades in the lower percentiles. 10-year history Price to earnings ((NTM)) is in the 15th percentile, while EV/EBITDA is in the 26th percentile. Those multiples compared with US energy and the US broad market figures are even lower. In conclusion, ARLP offers good value for its price.
Price Action
Despite the market turbulence, ARLP stock price performs well compared to the coal price ((XAL1)).
ARLP realized 2.87% YTD, while XAL1 (65.9)%. Peabody poorly performed YTD with (17.15) return YTD.
Let's see how the ARLP price action.
The price was declining in the first part of the year. However, since June, the price moved swiftly with four consecutive bull candles. In October, the monthly candle closed with a doji, showing the explicit balance between buyers and sellers. Besides that, the stock trades far away from the 36-month simple moving average ((SMA)). The SQN indicator shows a bull-quiet regime. A creeping bull trend with shallow dips characterizes the latter. I would not take a full-size position in such circumstances. I would buy with a third of the capital allocated to that idea, then observe patiently the price action and add on the dips.
Risks
The most significant risk for coal miners is another "green" decision restricting coal usage as an energy source. Europe realized renewables would not replace coal, gas, and nuclear. Even the Germans are restarting their coal-fired plants. Another dumb political decision is not impossible but is not so probable. ARLP has $374 million in debt and $197 million in cash. Although the debt is double, the company generates solid profits to cover the company's debt obligations. A further downturn in coal prices will not endanger the company's ability to run its operations and cover its debts. The risk of a broad market crash is always present, given the rising bond yields. The major indexes reached crucial support levels, and last week, they experienced a strong reversal. If the bond market bear takes time off and the yields settle, the equities will remain safe.
Investors Takeaway
Coal mining is among the best markets to invest in right now. Almost no one is excited about it, and still, many people loathe it. ARLP is one of the best options to bet on coal. The company realized strong returns and margins despite the declining coal prices. In the meantime, its management reduced the company's debt significantly. The high percentage of insider ownership is another reason to consider ARLP as an excellent vehicle to bet on coal. The company pays dividends with a juicy yield of 11.16%, much higher than Peabody and CONSOL. ARLP's share price offers a good, adequate margin of safety. The company's trades below previous EV/Sales and EV/EBITDA peaks. Ranked against US energy stocks and the US broad equity market, ARLP stock is cheaper, being in the lower percentiles. My verdict is a buy rating.
For further details see:
Alliance Resource: Coal Miner With Solid Financials And Exceptional Dividend Yields