Here's Why This is the Best Coal Stock to Buy... If There is One

While most other coal companies flounder, Alliance Resource Partners keeps racking up impressive growth and paying its investors a hefty distribution.

Apr 10, 2014 at 9:35AM

The publicly traded coal companies in the United States don't get much love. There are, of course many, reasons for this. Coal is under a great deal of political and public scrutiny in America. It's viewed as a dirty source of energy that represents the past much more so than the future. Its end users, such as electric utilities, have turned away from coal over the past year in favor of relatively cheaper and cleaner sources of energy such as natural gas.

Add it all up, and you'd be hard pressed finding a coal company worth investing in right now. Indeed, coal stocks such as Alpha Natural Resources (NYSE:ANR) and Peabody Energy (NYSE:BTU) suffered last year and burned their investors. They're idling facilities and busily cutting costs in an attempt to keep profits afloat, which hasn't really worked.

One coal stock continues to buck the over-arching headwinds facing its industry. That's Alliance Resource Partners (NASDAQ:ARLP), a coal MLP that is still finding a way to grow.

Alliance Resource Partners sets records, quarter after quarter

It seems absurd to say that a coal company is currently setting quarterly records like clockwork, but that's exactly what Alliance Resource Partners is doing. Its momentum accelerated as 2013 drew to a close, even as other coal producers were brought to their knees. For the year, Alliance Resource generated record revenue, coal sales volumes, earnings before interest, taxes, depreciation, and amortization (EBITDA), and profits. Its profits jumped 17% last year, on the back of 8% revenue growth.

This is while other coal stocks are struggling just to break even. Peabody Energy's EBITDA fell by nearly half last year. The primary culprit for its struggles was poor coal pricing which led to severely deteriorated margins. Shipments and tons sold increased slightly last year, but a 21% drop in Peabody's Australian coal margins took its toll.

Likewise, Alpha Natural Resources' revenue dropped by 28% last year, and its adjusted EBITDA fell 62%. The company faced the double-whammy of lower volumes and collapsing sales prices. Its shipments fell 20% last year, driven mostly by Eastern steam coal. Alpha Natural's other major area of production, metallurgical coal, remained steady. Overall, the spread between its realized selling price and cost per ton fell by seven percentage points, from 16% in 2012 to 9% last year, which dragged down profits.

Alliance Resource's industry outperformance is due largely to fortunate geographic positioning. Its mines are strategically located close to its end users. That way, it's able to produce and market its coal at a much lower cost than many other coal miners. Of its 11 underground mines, almost all of them are positioned near their utility customers. This results in a steadier and more consistent stream of business, evident by the fact that the vast majority of Alliance's 2014 sales volumes are already priced and under contract.

How Alliance Resource's investors profit
Alliance Resource has another leg up on the competition because of its tax structure. Due to its classification as a Master Limited Partnership, it enjoys a favorable tax structure and in turn is required to distribute the bulk of its cash flow to investors. That means ordinary investors win big by receiving a huge yield. Alliance Resource yields roughly 5.5% annualized.

And, even better, Alliance is able to increase its distribution regularly thanks to its operational success. Consider that Alliance Resource has increased its distribution for 23 consecutive quarters.

Why plenty of growth may be in store
Demand for coal in the United States has ebbed over the past couple of years, due to increasing political and public scrutiny. That makes it unlikely that many new coal-fired plants will be built in America any time soon. Utilities are increasingly turning to natural gas, which is cleaner and involves less detrimental effects to the environment.

This climate was borne out in the results of several coal stocks over the past year, such as Alpha Natural Resources and Peabody Energy. However, Alliance Resources thrived through this time. It's still managing to set new records with each passing quarter, thanks to its strict cost focus. It's doing so well even in such a tough operating climate, just imagine how well it can do if coal sees even a slight recovery in demand.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Bob Ciura owns shares of Alliance Resource Partners, L.P.. The Motley Fool recommends 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers