Prospects Heat Up After Alliance’s Earnings Report

Alliance Resource Partners (Nasdaq: ARLP  ) may not have stunned investors with its third quarter earnings report, but the prospects for the company over the next couple of years will.

The canary looks healthy
Even though overall coal revenues for Alliance jumped 5.3% for the quarter to bring in $499 million, net income fell 42%, to $60.5 million. Much of this quarter's losses resulted from a $24.1 million loss from idling operations at the company's Pontiki mine in Kentucky, and a $17.8 million loss from reduced sales of metallurgical coal in international markets. Pontiki was shut down by the Mine Safety and Health Administration because of faulty equipment, and will require large capital investments to bring it up to snuff.

Earnings per share for Alliance of $0.89 couldn't live up to Wall Street expectations. Keep in mind, though, that Wall Street estimates do not include one-time events, such as the Pontiki mine closure. The declared annual dividend increase to $4.34 per share will encourage investors, though.

Alliance CEO Joseph A. Craft III stated during the conference call on Oct 26 that, in YTD 2012, the company secured contracts to deliver 28.7 million tons of coal through 2018. This encouraging news led the company to update its guidance for the rest of 2012. Alliance now expects revenues from the sale of coal in the $1.95 to $2.05 billion range. Management also anticipates the production and sale of coal will increase 11%-13% in 2013. 

What a Fool believes
The constant battle between coal and natural gas keeps ramping up. With natural gas prices at 12-year lows earlier in the year, coal producers ate their hats trying to compete. Natural gas prices have jumped back to around $3.33 mmBTU, which puts coal back into play for both power plants and mining. The demand for metallurgical coal, both domestic and abroad, waned as expected from the slowdown in China and the overall weakness in both the U.S. and Europe.

The Pontiki mine close will give Alliance some headaches. The mine is located in the Central Appalachia Basin, which produces a high quality coal in terms of energy output (measured in BTU) and sulfur content. Most of Alliance's holdings are in the Illinois Basin, a region known for lesser quality coal. To compete in the space, the company will need to improve its presence in the Central Appalachia Basin. Management mentioned on the conference call that the capital expenditures to get the mine up and running again will be easily recuperated in 2013 production. Any future for the mine beyond that, however, is uncertain.

If there was one sector that could drastically suffer from environmental regulation, it's coal. So a play in coal could become hazardous if the government imposes stricter regulations on sulfur or mercury. That could be a few years from now, though, so it's worth it to see what companies are the best plays in the space.

Company

Return on Assets

5 yr expected EPS growth

P/E

Dividend yield

Alliance Resource Parnters

20.1%

25.49%

18.35

6.7%

Alpha Natural Resources (NYSE: ANR  )

-1.1%

0%

N/A (no earnings)

N/A

Arch Coal (NYSE: ACI  )

-3.6%

0%

N/A (no earnings)

1.6%

Consol Energy (NYSE: CNX  )

4.9%

5.64%

18.21

1.5%

Peabody Energy Corp (NYSE: BTU  )

6%

18.24

9.67

1.2%

Source, Yahoo! Finance

If you're looking to get into coal, Alliance is probably the best bet right now. They hold the best marks in expected growth, as well as return on assets. More impressive, though, is that nice fat dividend. I'll be making a CAPS call on Alliance to keep me honest.

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Fool contributor Tyler Crowe has no positions in the stocks mentioned above. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool

The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (0)

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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 October 27, 2012, at 3:54 AM, dy2 wrote:

    Although I am convinced Alliance is far better an investment than any other coal co. today, the author states that Alliance "may not have stunned investors with its third quarter earnings report, but the prospects for the company over the next couple of years will", but I don't see that the author has supported that extremely optimistic statement in this article. However, I do agree with it. The author should explain further.

  • Report this Comment On October 27, 2012, at 8:58 AM, Paulson545 wrote:

    Arch Coal just blew out earnings estimates. A harsh winter is on the way and the Wall Street Transcript reports that N Gas and Energy Stocks are in a 3 year up tend. I think coal stocks are why over sold.

  • Report this Comment On October 27, 2012, at 11:50 PM, neamakri wrote:

    I love dividends and ARLP has been good to me. Just sayin'.

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