One of the cheapest stocks in our All Investable Stock Screener is Alliance Resource Partners, L.P (NASDAQ:ARLP).
Alliance Resource Partners, L.P. (Alliance) is a producer and marketer of coal primarily to the United States utilities and industrial users. The company operates through segments, including Illinois Basin, Appalachia, and Other and Corporate. The Illinois Basin segment consists of various operating segments, including Webster County Coal, LLC’s Dotiki mining complex, Gibson County Coal, LLC’s mining complex, which includes the Gibson North mine and Gibson South mine, Hopkins County Coal, LLC’s mining complex, which includes the Elk Creek mine, the Pleasant View surface mineable reserves and the Fies property, White County Coal, LLC’s, Pattiki mining complex, Warrior Coal, LLC’s mining complex, Sebree Mining, LLC’s mining complex, which includes the Onton mine and River View Coal, LLC mining complex. The Appalachia segment consists of multiple operating segments, including the Mettiki mining complex, the Tunnel Ridge mining complex and the MC Mining mining complex.
A quick look at Alliance’s share price history over the past twelve months shows that the price is up 13%, but here’s why the company 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 $87 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has short-term debt of $178 Million and long-term debt of $447 Million. Therefore, Alliance has a net debt position of $538 Million (debt minus cash). While some investors may be concerned about the company’s net debt position, it’s important to take a look at Alliance’s free cash flow below. All financial strength indicators show that the company remains financially sound with a Piotroski F-Score of 7, an Altman Z-Score of 2.37, and a Beneish M-Score of -3.18.
If we consider that Alliance currently has a market cap of $1.492 Billion, when we add the minority interests of $6 Million and the net debt totaling $538 Million that equates to an Enterprise Value of $2.036 Billion.
If we move over to the company’s latest income statements we can see that Alliance had $419 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 4.86, or 4.86 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 $800 Million and had $90 Million in Capex. That equates to $710 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 35%.
Some analysts will argue that Alliance’s current revenues of $1.980 Billion (ttm) and net profit of $397 Million (ttm) are not as high as those recorded in 2014, when revenues were $2.301 Billion and net profit was $497 Million. But I would argue that the company’s current free cash flow of $710 (ttm) is 40% higher than the $432 Million recorded in 2014. Moreover, the company’s current free cash flow is at an historical high. The reason is the significant reduction in capex from $307 Million in 2014 to just $90 Million (ttm) today. The lowest its been in the past ten years.
It’s also worth taking a look at Alliance’s annualized Return on Equity (ROE) for the quarter ending March 2017. A quick calculation shows that the company had $1.088 Billion in equity for the quarter ending December 2016 and $1.141 Billion for the quarter ending March 2017. If we divide that number by two we get $1.114 Billion. If we consider that the company has $397 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2017 of 36%. All of which has been achieved while making debt repayments of $445 Million (ttm).
It is therefore difficult to understand Alliance’s current P/E of 4.8 compared to its 5Y average of 9.4*, The company is currently trading on a P/B of 1.3 compared to its 5Y average of 2.8*, and a P/S of 0.7 compared to its 5Y average of 1.1*. Alliance has a FCF/EV Yield of 35% (ttm), and an Acquirer’s Multiple of 4.86, or 4.86 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending March 2017 of 36%, and provides a dividend yield of 14%. All of which indicate that Alliance remains currently undervalued.
* Morningstar
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