One of the cheapest stocks in The Acquirer’s Multiple All Investable – Stock Screener is Alliance Resource Partners, L.P. (NASDAQ:ARLP).
ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. The company is involved in the production and marketing of coal, and according to the company’s website is currently the second largest coal producer in the eastern United States with mining operations in the Illinois Basin and Appalachian coal producing regions. ARLP currently operates eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. ARLP also operates a coal loading terminal on the Ohio River at Mount Vernon, Indiana.
A quick look at the company’s share price over the past twelve months shows the stock has risen 49.66% to $22.30 which is 16% off its 52 week high.
(Source: Google Finance)
The company recently released its Q1 2017 results. Highlights included an 11.7% increase in Q1 2017 revenues of $461 Million compared to $413 million for the previous corresponding period (pcp). The company also reported a 23% increase in gross profits of $189 million compared to $153 million for the pcp, and a 96% improvement in operating income of $108 million compared to $55 million for the pcp. The net result was a 91% improvement in net income of $105 million compared to $55 million for the pcp.
More Room For Growth
ARLP has cleary delivered a strong performance in Q1 2017 and despite the stock being up 49.66% over the past twelve months, there’s still more room for growth.
The company has benefited from higher export volumes in Q1 2017, and its average sales price per ton increased due partly to the shipment of a 156,000 tons of metallurgical coal. ARLP has updated its guidance and anticipates shipping an additional 835,000 tons into the export markets over the rest of this year, including 130,000 tons of metallurgical coal. Most of these tons are expected to ship in the second quarter of this year.
ARLP has also stated it is increasing its estimates for FY 2017 and anticipates coal production in a range of 38.1 million to 39.1 million tons, and coal sales volumes of 38.5 million tons to 39.5 million tons of which 35.5 million tons are priced and committed. Per ton cost for 2017 is expected to be 7% to 9% lower than 2016 levels, helping to offset the estimated decline in the average coal sales price per ton of 11% to 12%.
Additionally, estimated revenues, excluding transportation revenues, are expected to be in a range of $1.78 billion to $1.82 billion. With net income expected to be $290 million to $330 million and EBITDA of $605 million to $645 million.
President and Chief Executive Officer, Joe Craft is encouraged by the positive signs in the 2017 coal market saying, “The continuing resilience of natural gas prices, based upon the current natural gas forward NYMEX curve and assuming weather patterns for the this year are normal or better, yet comparable to last year, we believe domestic coal demand for the markets we serve will be higher in 2017 compared to 2016.”
He added, “With our expectations for improving coal markets in 2017 intact, we believe utilities will look to fill their open positions through spot purchases in the back half of this year and we will also seek to secure significant tonnage for the 2018, 2019 timeframe to build their short position.”
Loads of Free Cash Flow
ARLP is clearly set for further growth but there is plenty of evidence to suggest that the company still remains seriously undervalued. What sometimes gets overlooked most about ARLP is its ability to generate strong free cashflows.
A quick look at the company’s balance sheet at the end of Q1 2017 shows that ARLP has $87 million in cash and cash equivalents and total debt of $624 million which includes $177 million in short-term debt and $447 million in long-term debt, equating to net debt (total debt minus cash and cash equivalents) of $537 million. However, its important to take a look at the company’s statement of cashflows to get a clearer picture of the strength of ARLP.
A quick look at the company’s trailing twelve month cash flow statements shows ARLP generated $800 million (ttm) in operating cash flow up until the end of the latest quarter, Q1 2017. At the same time, the company had $90 million (ttm) in capex, which equates to $710 million (ttm) in free cash flow. With a current market cap of $1.66 Billion that means ARLP has a FCF/Price yield of 42% (ttm). If we add the $537 million in total debt to the current market cap of $1.66 Billion that means ARLP has an Enterprise Value of $2.2 Billion and a FCF/EV Yield of 32% (ttm).
We favor EV over market capitalization as it includes additional liabilities–like debt, preferred equity and non-controlling interests–if you were to purchase the entire company. EV is calculated as:
Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents.
With an Enterprise Value (EV) of $2.2 Billion and Operating Earnings* of $419 million (ttm), that means ARLP is currently trading on an Acquirer’s Multiple of 5.27 or 5.27 times Operating Earnings*.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
Therefore, ARLP is currently trading at a FCF/Price yield of 42% (ttm), a FCF/EV Yield of 32% (ttm) and an Acquirer’s Multiple of 5.27 or 5.27 times Operating Earnings. Combine this with the fact that the company has updated its guidance, with net income expected to be $290 million to $330 million for FY2017, and is currently trading on a P/E of 5.4, a P/B of 1.5 and a P/S of 0.8, compared with its 5Y average of P/E 9.4, P/B 2.8, and a P/S of 1.1. All of which indicates that ARLP is squarely in undervalued territory despite the 49.66% rise in its share price over the past twelve months.
Lastly, ARLP has paid out $212 million in dividends in the past months. Based on its current market cap of $1.66 Billion that means the company also provides a nice Dividend Yield of 13% (ttm).