One of the cheapest stocks in our All Investable Stock Screener is Alliance Holdings GP LP (NASDAQ:AHGP).
Alliance Holdings GP LP (Alliance) is a limited partnership formed in November 2005 to own and control Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P. (ARLP), a publicly traded limited partnership engaged in the production and marketing of coal to major U.S. utilities and industrial users.
A quick look at Alliance’s share price history over the past twelve months shows that the price is up 10%, but here’s why the company is remains undervalued.
The following data is from the company’s latest financial statements, dated March 2017.
The company’s latest balance sheet shows that Alliance has $92 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $178 Million in short-term debt and capital leases, and long-term debt and lease obligations of $447 Million. Therefore, Alliance has a net debt position of $533 Million (debt minus cash).
If we consider that Alliance currently has a market cap of $1.535 Billion, when we add the net debt totaling $533 Million plus the minority interests of $546 Million that equates to an Enterprise Value of $2.614 Billion.
If we move over to the company’s latest income statements we can see that Alliance had $412 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.34, or 6.34 times operating earnings. That places Alliance squarely in undervalued territory.
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.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Alliance generated trailing twelve month operating cash flow of $797 Million and had $90 Million in Capex. That equates to $707 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 27%. So while the company appears to have a lot of debt when compared to its cash when you consider that Alliance has $707 Million (ttm) in FCF the total amount of debt, $533 Million becomes much less significant.
In terms of its financial strength, all financial strength indicators show that Alliance remains financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 2.10, and a Beneish M-Score of -3.58.
Regarding its growth prospects, while some analysts may argue that Alliance’s current revenue of $1.979 Billion (ttm) and net profit of $210 Million (ttm) is well off the 2014 revenues of $2.300 Billion and net profit of $284 Million I would argue that Alliance is in a much better position for growth when you compare its current free cash flow of $707 Million (ttm) to the $427 Million in 2014.
Moreover, Alliance’s current operating cash flow of $797 Million (ttm) is an historical high while capex of $90 Million (ttm) is an historical low. Additionally, Alliance’s current book value per share of $10.10 has been higher in one other year, 2012 when it was $11.82 but we shouldn’t forget that in that same year the company posted a net loss of $135 Million and its free cash flow was just $87 Million compared to the $707 Million (ttm) that we see today. Alliance has become much more operationally efficient with gross margins around 40% (ttm) and operating margins around 20% (ttm) but most importantly it’s the company’s ability to generate free cash flow going forward thanks to the significant reductions in capex.
Something else that seems to get overlooked regarding Alliance is its annualized return on equity (ROE) for the most recent quarter. The company had $582 Million in equity for the quarter ending December 2016 and $604 Million for the quarter ending March 2017. If we add those two numbers together ($1.186 Billion) and divide by two we get $593 Million. If we consider that Alliance has $210 Million (ttm) in net income that equates to an annualized return on equity (ROE) for the most recent quarter of 35%. At the same time the company has reduced its long-term debt and capital lease obligations by 10% and has not issued any new shares. And, the company pays a nice dividend yield of 9%.
As for Alliance’s current valuation, the company is currently trading on a P/E of 7.3 compared to its 5Y average of 12.4*, a P/B of 2.6 compared to its 5Y average of 4.9*, a P/S of 0.8 compared to its 5Y average of 1.3*, a FCF/EV Yield of 27%, and an Acquirer’s Multiple of 6.34, or 6.34 times operating earnings. Plus, a dividend yield of 9%. All of which indicates that Alliance sits squarely in undervalued territory.
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Article by Johnny Hopkins, The Acquirer's Multiple