Recent times haven’t been good to the coal industry. Thermal coal, for use in electric power plants, has seen reduced demand as utilities have increasingly switched to cheap natural gas (thanks to shale gas, U.S. natural gas production as increased dramatically). Metallurgical coal, for use in steel production, is also not doing particularly well as the global economy has weakened and reduced demand for steel; United States Steel Corporation (NYSE:X)’s revenues were down 8% in the third quarter compared to the same period in 2011.
Alliance Resource Partners, L.P. (NASDAQ:ARLP), a $2.1 billion market cap coal miner, has been impacted by these industry dynamics. It reported a 5% rise in revenue for the third quarter of 2012 compared to the same period in 2011, but this was driven entirely by an 18% increase in production. Since higher production was accompanied by higher costs, the company reported a 20% decrease in operating income even excluding an impairment charge. The stock has fallen 26% year to date.
Company insiders seem to think that the market has overreacted to Alliance Resource Partners, L.P.’s troubles. On November 30th, company Vice President and Controller Robert Fouch purchased 8,000 shares of the stock at an average price of $56.99 per share. This came about two weeks after Board member Torrence Wilson had bought 1,000 shares at an average price of $52.87. Studies show that on average insider purchases tend to be bullish signs (see more about studies on insider trading). We think that this is partly because insiders should prefer to diversify their wealth away from the company, and so will tend to avoid buying shares unless they are confident in the stock’s prospects. When there is consensus insider buying, studies indicate that the stock will (again, on average) perform even better. We’d also note that Wilson had most recently purchased shares in February 2009, at prices of less than $26 per share. See a history of insider purchases at Alliance.