Alliance Resource Partners, L.P. (NASDAQ:ARLP) operates in the coal industry, which has been going through a rough phase over the last few years. All companies in the industry suffered because of the slowing coal demand and low average coal price. Alliance Resource Partners, L.P. (NASDAQ:ARLP) was one of the least affected companies in the industry.
Its stock has been quite volatile over the last one year, but has appreciated more than 25%. While its competitors are struggling to even post profits, Alliance Resource Partners, L.P. (NASDAQ:ARLP) has not only been posting profits, but also distributing a large part of it to its shareholders. The stock seems to have upside potential due to a number of reasons.
Rising dividend yield
The company has consistently increased its dividends. It has increased its dividend by around 320% over the last ten years and by around 90% over the last five years.
It recently raised its dividend again by around 2% to $1.13. The trailing dividend yield for the company is 6.61%, while the forward dividend yield is 6.70%. This is very high as compared to the dividend yield for the industry, which is 3.41%. The five year dividend growth rate has been a phenomenal 13.60%. The payout ratio is also high at 68% as compared to around 39% for the industry. The stock is expected to continue distributing dividends to its investors in future as well, and therefore, is suitable for investors looking for regular cash flows.
Strong quarterly earnings
According to its recently released quarterly earnings, the company’s revenue increased 23.6% to $548.1 million, while its EBITDA increased 31.7%. Net income also rose 24.1% to $102.9 million, resulting in an EPS of $1.95. This beat the consensus estimate of $1.36 by a long margin. The unit sales of the company increased 24.1% to 9.7 million.
This performance was due to increased coal production and increased average sales price. Management expects the increase in coal production to continue in 2014 as well. The company has substantial coal reserves and a major part of it has already been contractually confirmed for the next few years by the buyers. This indicates further stock price appreciation potential.
Fundamentals
The company is fundamentally very strong. Despite being in a capital intensive industry, it is quite liquid. Its current ratio and quick ratio are much higher than the industry peers. Even its interest coverage ratio is less than 1% of the industry average. This illustrates the financial strength of the company. The efficiency with which the company is managing its assets is evident from the high turnover ratios as compared to the industry.
The company’s high return on equity suggests an optimistic long term growth potential. Therefore, the strong balance sheet and the robust cash flows indicate further upside potential.
13F Filers buying the stock
During the quarter ended on March 31, 2013, there were 46 13F filers who held Alliance Resource Partners, L.P. (NASDAQ:ARLP)’s stock. Out of these 46 investors, 19 increased their position in the stock, while 18 held on to their stock holdings. Rest 9 investors reduced their position during the quarter. Overall, this signals that a large number of investors expect the stock to go up, and are therefore either buying or holding it.
Competitors
Peabody Energy Corporation (NYSE:BTU) recently posted a loss of $19.4 million compared to a profit of $178.3 million in the year ago period. This was primarily because of higher non-cash expenses. But, the company has expressed optimism due to an expected increase in coal demand in China, where steel production rose by 9%. This is expected to lead to an increase in coal imports.
Its stock price followed a similar trend to Walter Industries, with more than a 70% decline since March 2011. The company’s trailing P/E ratio is 14.4, which is higher than the industry average of 13.98. Its forward P/E ratio is 11.69, but the EPS growth forecast for the next five years is negative. Therefore, the stock doesn’t seem to be a profitable investment at the moment.
Arch Coal Inc (NYSE:ACI) reported a 20.6% fall in revenue in Q1 2013 as compared to the same quarter last year. Net income also fell by $70 million as compared to a profit of $1.2 million last year. The number of shares that are short are 4.4% of the total outstanding shares. This reflects the pessimism among investors in the short-term. But because of the low cost operations and capital spending reductions, the company is expected to generate strong cash flows and value for the shareholder in future.
Its stock was trading at around $36 in early 2011, but then it plummeted like all its industry peers. It’s currently trading at $5.40. Its P/S and P/B ratios seem undervalued when compared to its peers. With positive earnings forecasts in the next few years and low current valuations, the stock might to do well in the long-term.
Conclusion
Alliance Resource Partners, L.P. (NASDAQ:ARLP) might prove to be a profitable investment because of its strong fundamentals and promising growth potential. It has been posting strong quarterly results despite being in an industry which has been going through a rough time. There is some optimism about the company as most of the 13F filers who have invested in the stock are currently holding it.
Its stock is trading at a trailing P/E ratio of 10.50, which is lower than the industry average of 13.98. The forward P/E ratio is even lower. The trailing P/S and trailing P/CF are also much lower than the industry average. All this indicates that the company is undervalued right now, and may see a correction in the future. Its 6.7% dividend yield would continue to provide regular income to its investors.Therefore, investors might want to stay invested in the stock to get high overall returns.
The article Buy This MLP for Its Dividend Yield and Long-Term Growth originally appeared on Fool.com and is written by Shas Dey.
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