It's well understood that coal is under immense pressure in the United States due to increasing regulatory oversight and the threat of cheap domestic natural gas. With these serving as twin headwinds, major coal producers such as(BTU) CONSOL Energy (CNX 0.25%) and Peabody Energy (BTU) are struggling mightily and are reporting collapsing profits.
At the same time, one coal company continues to not only survive what amounts to an extremely tough environment for coal, but thrive. Its underlying results over the past year have bucked those reported by the broader industry time and again, and this is exactly why Alliance Resource Partners (ARLP -1.63%) remains the only coal stock worth buying.
Simply succeeding where others cannot
The threats facing most coal companies have been well-documented. Most simply cannot cope with the intense strains on the industry, and some are resorting to asset sales and slashed dividends to keep their heads above water. Consider that CONSOL recently announced it would sell five of its coal mines to privately held Murray Energy in a deal worth $3.5 billion. It will use these proceeds, along with additional funds saved from the company's decision to cut its dividend in half, to expand its presence in the production of gases, including natural gas. Whether the company's new strategic direction proves successful remains to be seen, but it's nevertheless signaling to investors that it simply can't continue as a pure coal company.
Like so many of its rivals, Peabody Energy is also struggling mightily. Its third-quarter revenue fell 12%, due largely to lower pricing and flat volumes for its U.S. coal shipments in comparison to the same quarter last year. In all, Peabody has earned $0.34 per share in adjusted diluted earnings through the first nine months of the year, compared to $1.94 through the first nine months of 2012.
Going forward, there isn't much hope for the remainder of the year to be strong for Peabody. The company expects continued deterioration in the U.S. coal market, and management projections are for U.S. revenues per ton to decline between 5% and 10% for the full year as opposed to 2012 levels. Furthermore, Peabody expects full-year 2013 adjusted diluted earnings to clock in at $0.36 per share at the midpoint of its guidance. That would represent a whopping 57% decline from the company's full-year 2012 results.
Meanwhile, Alliance Resource Partners simply reports excellent numbers, quarter after quarter. The company's third-quarter results were impressive across the board. The company reported higher tons sold, 5% higher revenue, and impressive 24% growth in earnings before interest, taxes, depreciation, and amortization (EBITDA). One cautionary note is that Alliance Resource's coal sales price per ton fell 2% in the quarter, but that is an entirely manageable decline given the company's excellent efficiency and productivity.
Alliance Resource Partners is showing strength in virtually every metric important to a coal company. While others are reporting falling volumes, revenue, and profits, Alliance Resource Partners is literally doing the opposite. And, thanks to its structure as a master limited partnership, which requires it to distribute the bulk of its cash flow through to investors, unitholders succeed right alongside the company. Along with its quarterly results, Alliance Resource Partners increased its distribution for the 22nd consecutive quarter. Its next distribution will be 8% higher than the same November distribution one year ago.
Let compound interest work its magic
I first initiated a position in Alliance Resource Partners last year, and thanks to an advantageous entry price in addition to reinvested distributions, my cost basis is down to under $54 per unit. At first glance, with Alliance Resource currently trading for $76 per unit, some might have sold by now to take profits. However, I'm not even slightly tempted to sell, and the reason is simple: compounding interest.
With Alliance's boosted distribution, my yield on cost (which measures the dividend yield relative to my personal cost basis) is up to 8.75% annualized. That will only grow as time passes, thanks to reinvesting those fat distributions as well as future distribution growth. While it's always reasonable to consider locking in impressive gains, I'm in Alliance Resource for the long haul. I believe it to be the most well-run coal business in the industry, and I'm confident that coal will play a key role in our domestic energy mix for many years to come.
