Joy Global's (NYSE:JOY) fiscal third quarter earnings didn't provide much to write home about. However, the company's outlook for the U.S. coal industry did. Following up on this, income investors should take a look at U.S. coal miners like Alliance Resource Partners (NASDAQ:ARLP) and Rhino Resource Partners (OTC:RHNO).
Joy Global sells mining equipment. Its earnings in the July ended quarter were down 5% year over year after falling over 15% in the April quarter. The sales declines were about 5% and 12%, respectively, in the two periods. In fact, after the fiscal second quarter, the company lowered its guidance for the year.
Although management reiterated its full-year guidance for the year when it announced third-quarter results, it noted that the "fourth quarter will reflect the transition to lower volumes" as the company burns down its backlog. In fact, it doesn't see much light at the end of the tunnel until the end of 2014 because its customers continue to put off big projects.
Investors are best off avoiding the company for now, particularly since its dividend yield of about 1.4% isn't a compelling reason to stick around through lean times. That said, in its second quarter release, Joy Global's management noted that "The U.S. coal market was the first to correct. Those corrections are mostly completed, and demand for coal-fueled power generation is improving."
In the third quarter release, Joy Global was even more specific: "Stockpile depletion [at U.S. utilities] will continue in the second half..." which "...should result in coal production increases in 2014." That's good news for the beleaguered U.S. coal industry.
Leading the pack
In its second quarter release, Joy Global went on to note that "most of the incremental coal burn above $4.00 [natural gas] will come from the Illinois Basin and Northern Appalachia..." These two coal regions account for the majority of Alliance Resource Partners' coal production.
Alliance increased its net income guidance at the end of the second half. That's not surprising since its coal sales volume was up about 13% year over year in the second quarter. So, despite a 7% decrease in coal prices, the company reported yet another quarter of record results. It also upped its quarterly distribution.
Alliance is a good choice for conservative income investors. It yields around 6.1%, and the distribution has been increased at least annually for a decade. Moreover, it is performing well despite the industry's current woes. Although the shares aren't as moribund as others in the coal space, Alliance's yield, regular distribution hikes, and modest capital appreciation potential should make it a compelling investment opportunity for just about any investor.
More risk, broader focus
For more intrepid investors, Rhino Resource Partners might be an interesting option. The partnership owns coal mines across the United States including in Northern Appalachia and an expansion project in the Illinois Basin. That new mine is expected to come on line in 2014 and already has a long-term sales agreement in place.
Unlike Alliance, however, Rhino has been struggling through the coal market's correction. For example, Rhino sold about 18% less coal in the second quarter of 2013 than it did in 2012. Couple that with a nearly 4% drop in realized coal prices and the company's coal revenues fell over 20% year over year. That's clearly not good news.
However, Rhino is selling non-core assets, still investing in growth projects within the coal space, and is expanding into other areas, like oil and gas drilling. The latter effort is small today, but it's been growing quickly, with oil and gas revenues advancing nearly 300% sequentially between the first and second quarters. With only 15 wells on line at the end of July, the growth prospects here are notable and will help to offset the weakness in coal that Joy Global suggests will last through year end.
The most notable aspect of Rhino, however, is probably its yield of around 14%. Although the company isn't performing nearly as well as Alliance, investors are being paid very well to wait for a coal market recovery.
Still, the distribution was trimmed in early 2012 and the general partner (GP) has chosen not to receive distributions on its subordinated units. These actions might appear concerning on the surface, however, both moves have allowed Rhino to continue to invest in its future while maintaining an exceptionally low debt level.
In fact, debt makes up just a third of the capital structure, essentially unchanged from the same period a year ago. The GP could have easily used debt to fund growth and pay distributions. So, what appears on the surface to be a negative is actually pretty positive. It's also an impressive statement about Rhino's management's alignment with shareholders.
A fall and a turn
The U.S. coal industry is in the process of balancing supply and demand. That's being achieved through mine closures and the burning of coal stockpiles at utilities. Although these trends will likely remain a drag on mining equipment companies like Joy Global, they are setting the stage for a recovery at Rhino and a continuation of the strong results at Alliance.