Stock Analysis & Ideas

After Massive 722% Rally, is Alliance Resource Stock (NYSE:ARLP) a Buy?

Story Highlights

Suddenly, everyone has forgotten about climate crises and tracking their ESG goals, as demand for coal has skyrocketed. Alliance Resource Partners appears well-positioned to keep printing cash, with disruption in the energy markets likely to persist.

Alliance Resource Partners (NYSE: ARLP) investors have experienced the wildest roller coaster ride over the past few years. The stock had plunged to an all-time low of $2.63 back in October 2020 before commencing a monster rally to its current price of around $22.81. That’s a 722% return in just over two years, excluding dividends. You didn’t even have to time the stock to make mad gains. Even if you were late to the party and had bought the stock a year ago, Alliance has still gained by around 125% since.

With that said, let’s examine the following:

  • What has caused Alliance Resource Partners’ stock to skyrocket?
  • Why I am bullish on the stock despite its extended rally.

What Has Caused Alliance Resource Partners’ Stock to Skyrocket?

From the Gutter…

To answer this question, some context is needed. Basically, Alliance Resource Partners is one of the largest American coal producers left. I say “left” because as the global community had been attempting to reduce carbon emissions and move to cleaner sources of energy, demand for coal had been on the decline for years. With organizations of all types aiming to achieve their ESG targets resulting in demand for coal plummeting, coal miners were forced to start shutting down one coal mine after another.

For context, from 2008 to 2020, the number of producing U.S. coal mines fell from around 1,500 to 551. Of these 551, 151 were idle/offline. Accordingly, coal miners such as Alliance Resource Partners were experiencing a horrific bear market and an existential crisis even. The underlying trend was essentially leading to coal miners potentially going out of business if it were to continue in the coming years and/or decades. No wonder Alliance’s shares were trading at all-time-low levels in October 2020.

…to the Heavens

Since then, Alliance Resource Partners has been granted the most ideal trading environment possible. Following the re-opening of the economy, once COVID-19 started to loosen, elevated demand for energy started pushing coal prices higher, as coal became a temporarily useful source of alternative energy.

However, once the Russian invasion of Ukraine started, that’s when coal prices started going bananas. With the West imposing heavy sanctions on Russian oil and natural gas, energy prices skyrocketed. When everybody was looking for cheap energy, guess what commodity was standing there alone in a corner: good ol’ coal. Here’s the gripping part, though. Remember how all these mines shut down over the past several years? Well, the remaining producers ended up with all the leverage in the world.

During an energy crisis, in which everyone is looking for the cheapest and most readily available commodity, coal producers found themselves able to charge as much as the next available alternative. In fact, even with oil prices somewhat correcting lately, coal prices hover near all-time highs. Coal futures are currently hovering at $408 per tonne, much higher than their 2020 lows in the high $40 range. At these levels, Alliance Resource Partners is basically printing cash.

Why am I Bullish on ARLP Stock Despite Its Extended Rally?

The reason why I am bullish on ARLP Stock and why the stock is likely poised for further upside from its current levels is simple: coal prices have gotten so high that Alliance Resource can sustain its ongoing victory lap even if they were to be halved.

To give you some context, in its most recent Q3 results, the partnership recorded total revenues of $628.4 million, implying a year-over-year increase of 51.3%. Further, adjusted EBITDA landed at $271.5 million, implying an adjusted EBITDA margin of 43%, which just illustrates how profitable the partnership is at the current coal price levels.

Based on its year-to-date results and Q4 outlook, the company is expected to produce earnings-per-unit of $4.31 for the year, which means the stock is trading at a forward P/E of just 5.0x. It’s true that the low valuation multiple prices in the possibility of a reduction in earnings amid coal prices possibly falling. However, there are no catalysts that point to lower coal prices as actions persist, and the world needs cheap and reliable energy more than ever.

In the meantime, Alliance has been deleveraging rapidly, which has reduced its interest expenses, meaning that net income has another positive catalyst in place as well.

Is ARLP Stock a Buy, According to Analysts?

Turning to Wall Street, Alliance Resource has a Moderate Buy consensus rating based on just two Buys assigned in the past three months. At $29.00, the average Alliance Resource price target implies 34.2% upside potential.

Takeaway: The Case for Further Upside is Strong

Alliance Resource Partners makes for a great way to bet on coal remaining strong. Energy availability continues to become increasingly disrupted amid tough geopolitical tensions. However, hardly any new coal mines come online, which means that the existing players will continue profiting massively.

With investors looking at cash-generative businesses with unique competitive advantages in the current capital markets environment, I can easily see Alliance trading at a higher multiple, especially considering the huge dividends it pays out these days.

Disclosure

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