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Jonathan Poland
Jonathan Poland
Articles (225)  | Author's Website |

Value In Coal With Alliance Holdings (AHGP) & Alliance Partners (ARLP)

May 25, 2015 | About:

Alliance Holdings GP, LP  (NASDAQ:AHGP) is a limited partnership formed to own and control Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, LP (NASDAQ:ARLP). Together they operate ten underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia.

From a financial standpoint, the Alliance companies are rock solid, essentially sharing very similar growth records.

2005

  • Sales: $839 million
  • Income $76 million
  • Assets: $533 million
  • Book: $4.00

2015

  • Sales: $2.3 billion
  • Income $282 million
  • Assets: $2.3 billion
  • Book: $9.32

The companies also have kept the total debt under three times net income and crushed it with return on equity in the 50% range and gross margins above 30%.

The biggest challenge for the companies comes from slowing growth in China, which is the world’s largest consumer of coal. China’s economy is now projected to expand at approximately 7.0% in 2015, a far lower rate than the double digits it produced just a few years ago.

The good news is that new environmental regulations, passed in recent years, have essentially prohibited the construction of new coal-fired power plants in the United States. This means Alliance has a decent moat to work with and with the second largest coal reserves in the Illinois basin, can produce enough coal to power the U.S. for another 160 years at current consumption levels.

In its 2014 annual report the company stated that “Through strategic acquisitions of an additional 452.2 million tons of Illinois Basin coal reserves, we increased total coal reserves by 50 percent to approximately 1.6 billion tons.”

Considering the issues affecting the coal Iidustry, Alliance is well positioned to take advantage.

By comparison it takes Peabody Energy (NYSE:BTU) over $13 billion in assets to generate roughly the same amount of gross profit that Alliance does with $2.3 billion. Peabody, the largest domestic miner, has posted bottom-line deficits in each of the last three years. To me, BTU doesn’t have the same efficiencies as Alliance, who would be in a great position to pick up market share on any falters by less capable miners.

BTU is owned by Arnold Schneider (Trades, Portfolio), Donald Smith (Trades, Portfolio), and Mario Gabelli (Trades, Portfolio). Neither ARLP nor AHGP have garnered guru interest yet.

At this point, either AHGP or ARLP is a good investment that I believe will outpace the S&P 500 over the next decade. However, I think it’s fair to say ARLP is a better trade, simply because of the higher dividend payout and lower price multiple. At some point in the future, the two stocks will trade close to parity, which will probably be at a higher multiple for ARLP.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher that has helped investors produce market beating results since 2001. Today, I turn 40,000 hours of work analyzing and forecasting the world's leading investments into models for better business development.

Visit Jonathan Poland's Website


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