Is Alliance Resource Partners the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide whether Alliance Resource Partners (Nasdaq: ARLP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that a company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Alliance Resource Partners.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.4% Fail
  1-Year Revenue Growth > 12% 28.9% Pass
Margins Gross Margin > 35% 34.8% Fail
  Net Margin > 15% 16.0% Pass
Balance Sheet Debt to Equity < 50% 142.7% Fail
  Current Ratio > 1.3 3.24 Pass
Opportunities Return on Equity > 15% 79.5% Pass
Valuation Normalized P/E < 20 12.98 Pass
Dividends Current Yield > 2% 4.7% Pass
  5-Year Dividend Growth > 10% 14.2% Pass
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With seven points, Alliance Resource Partners is powering up shareholders toward perfection. The company has benefited from rising energy prices, and with the future of nuclear energy called into question by the Japanese disaster, the coal producer may prove to have a second wind.

Alliance produces coal primarily to turn around and sell it to utilities, which then use it to generate electricity. It's structured as a master limited partnership, which gives it certain tax benefits over regular corporations. In addition, it's the reason Alliance has a much higher dividend yield than competitors Arch Coal (NYSE: ACI  ) , Peabody Energy (NYSE: BTU  ) , and CONSOL Energy (NYSE: CNX  ) .

In fact, it's Alliance's dividend that makes it stand out from the pack. Over the past 10 years, the company has increased its payout a whopping 25 times. The frequent raises also contribute to its fast dividend-growth rate.

Of course, dividends are worthless if a company doesn't have earnings to back them up. But Alliance scores well in that regard as well. In its most recent quarter, the company posted 11% revenue growth, with net income rising by almost 28%. Those impressive returns have captured the attention of coal investors.

With the leverage necessary to produce such massive returns on equity and the ups and downs of any commodity business, Alliance may never reach perfect-10 status. But if you're looking for solid, growing income and good prospects for future growth, you could certain do worse than Alliance.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Add Alliance Resource Partners to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 16, 2011, at 5:43 PM, neamakri wrote:

    (ARLP) is a cornerstone of my portfolio (almost 10% of my IRA account). Hey, coal makes electricity, and everybody uses electricity. They pay dividends like an ATM.

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