2 Sides of the Coal Coin to Watch in First Quarter Earnings

Alliance Resource Partners and Walter Energy are on opposite sides of the performance spectrum and the first quarter will prove that.

Apr 24, 2014 at 10:28AM

When it comes to coal miners, only one stands out for good performance: Alliance Resource Partners (NASDAQ:ARLP). At the other end of the spectrum is Walter Energy (NASDAQOTH:WLTGQ), which looks like it's in an increasingly tenuous financial position. That said, first quarter results will be just as important at Alliance as they will be at Walter.

Is this the year of the slowdown?
Alliance Resource Partners posted its 13th year of record results in 2013. Management expects the current year to add to that total. However, there's an interesting trend to watch in those numbers. For example, the high end of Alliance's coal volume sales estimate calls for a 5% increase.

That's not bad, but it's roughly half the increase achieved in 2013. Revenue growth is also expected to be half of what it was in 2013, at around 4% or so. For a coal miner, this is actually rock-star performance right now. But for Alliance Resource Partners, it's a slowing trend.

Investors bid Alliance's shares up some 40% since the start of 2013. The company was, basically, the safe bet in an out of favor sector. When investors rush in like that, however, expectations get elevated, often to unrealistic heights. If 2014 plays out the way Alliance is projecting, investors might be disappointed.

ARLP Chart

ARLP data by YCharts

To be sure, Alliance still has an enviable position in the Illinois Coal Basin, where all but four of its 14 mines live. The area, which is benefiting from a long-term utility coal basin switch, accounts for about 80% of its production. And it's still investing in production, which means long-term growth should continue. But the 2014 pace may not be enough to appease fickle investors. Expect a solid first quarter from Alliance, but pay more attention to the market's reaction.

Surviving to fight another day
Walter Energy, meanwhile, is at the opposite end of the performance spectrum compared to Alliance. The company's shares have fallen over 75% since the start of 2013. Worse, over 80% of the company's coal sales are metallurgical. That sector of the coal market remains out of favor even though there are signs of life in the domestic thermal coal market.

WLT Chart

WLT data by YCharts

In fact, falling met coal prices led to a loss of $5.74 per share in 2013 despite cost cutting and increased sales volumes. While that was an improvement on the nearly $17 a share loss in 2012, Walter can only lose that kind of money for so long before it catches up with the miner. And since met prices are still in the doldrums, the first quarter is likely to be another one of red ink.

That helps explain why Walter just replaced old debt with new, higher interest debt. It also included a PIK provision in some of the debt that allows it to pay bondholders with more debt instead of cash. This is the type of thing you do in preparation for hard times.

All of that said, if Walter can survive this met coal downturn, there's huge upside potential. But only if it survives. So look for 2014 to be another bad year, but aggressive investors may want to keep a close eye on Walter's balance sheet. If it holds up, Walter could be a great turnaround play.

Opposite graphs
The price graphs for Walter and Alliance are complete opposites. However, there may be more risk than you expect in Alliance's shares if investors are expecting too much in 2014 based on the miner's robust 2013 showing. Keep a close eye on the market's reaction to first quarter earnings. Walter appears to be a bankruptcy risk. If it manages to escape that fate, however, Walter's shares could trounce Alliance's over the next few years. Just keep a close eye on the balance sheet, since that's where the story is for this miner.

While coal is still a difficult market, this industry is just getting started
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. 

Reuben Brewer has no position in any stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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 Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information