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, L.P. (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 Corporation (NYSE:BTU) or Arch Coal Inc (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 Limited (ADR) (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%.