A geopolitical crisis, sky-high inflation, and the Fed’s tightening monetary policy had stoked fears of a recession. Amid a volatile market, Alliance Resource Partners, L.P. (ARLP) might be a wise choice for investors for the reasons mentioned in the article.
Major global powers have taken bold climate pledges and launched strategies to phase out coal production and its use over the upcoming years. However, gas shortages and increased oil and gas prices have raised the reliance on coal for power and industry. Its demand is projected to remain strong in 2023.
In addition, the current market volatility on the backs of macroeconomic headwinds is projected to linger for a while. Against this backdrop, high-quality coal stock ARLP, with major upside potential, might be a solid buy now.
ARLP is a diversified natural resource company that produces and markets coal primarily to utilities and industrial users in the United States. The company operates through four segments: Illinois Basin Coal Operations; Appalachia Coal Operations; Oil & Gas Royalties; and Coal Royalties.
In January, ARLP announced a 40% increase in quarterly distribution rate to $0.70 per unit or $2.80 per unit on an annualized basis. Mr. Craft commented, “This increase is consistent with our long-term strategic capital allocation plans and is well-supported by strong visibility into future cash flows with approximately 94% of our expected 2023 coal sales volumes committed and priced as we enter the year.”
Its annual dividend rate of $2.80 yields 14.54% on the current market price, and its four-year average dividend yield is 13.53%.
On January 27, 2023, the ARLP’s board approved an acquisition of 2,682 net oil and gas royalty acres in the Permian Basin from JC Resources LP, an entity owned by Mr. Craft, for a cash purchase price of $72.3 million.
The stock gained 2.4% intraday to close its last trading session at $19.26. Moreover, it has gained 23.3% over the past year. Wall Street analysts expect the stock to reach $30 in the upcoming 12 months, indicating a potential upside of 55.8%.
Here are the factors that could influence ARLP’s performance in the upcoming months:
Solid Financials
For the fiscal fourth quarter that ended December 31, 2022, ARLP’s total revenues came in at $700.73 million, up 48% year-over-year. Its income from operations increased 255.3% year-over-year to $217.24 million. Furthermore, net income attributable to ARLP and net income per share stood at $214.45 million and $1.63, up 313.8% and 307.5% year-over-year, respectively.
Robust Profitability
In terms of the trailing-12-month net income margin, ARLP’s 23.98% is 73.1% higher than the industry average of 13.86%. Likewise, the stock’s trailing-12-month levered FCF margin of 12.77% is 89.4% higher than the industry average of 6.74%.
In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 39.44%, 21.62%, and 21.69% are 83.6%, 118.1%, and 177.6% higher than the industry averages of 21.48%, 9.91%, and 7.81%, respectively.
Optimistic Analyst Estimates
For the fiscal first quarter ending March 2023, analysts expect ARLP’s EPS to increase 370.2% year-over-year to $1.32. Street expects its revenue to increase 47.6% year-over-year to $680.34 million for the same quarter.
Moreover, for the fiscal year ending December 2023, its EPS and revenue are expected to increase 35.8% and 18.4% year-over-year to $5.96 and $2.85 billion, respectively.
POWR Ratings Reflect Promising Prospects
ARLP’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ARLP is rated an A for Sentiment, justified by the optimistic analyst estimates.
It has a B grade for Growth, consistent with its solid financial growth in the last reported quarter. It also has a B grade for Quality, in sync with its robust profitability.
Within the B-rated 9-stock MLPs – Other industry, it is ranked #2.
To see additional POWR Ratings for Value, Stability, and Momentum for ARLP, click here.
View all the top stocks in the MLPs – Other industry here.
Bottom Line
Considering the current market dynamics, ARLP is well-positioned to witness significant growth in the near term, owing to the increased demand for coal. Moreover, given the solid financials and reliable dividend payments, investors could buy the stock to ensure a steady passive income.
How Does Alliance Resource Partners, L.P. (ARLP) Stack up Against Its Peers?
While ARLP has an overall POWR Rating of A, one might want to consider looking at its industry peers, Westlake Chemical Partners LP (WLKP), Steel Partners Holdings LP LTD PARTNERSHIP UNIT (SPLP), and Blueknight Energy Partners G.P. LLC (BKEP), which also have an overall A (Strong Buy) rating.
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ARLP shares were trading at $19.36 per share on Monday afternoon, up $0.10 (+0.52%). Year-to-date, ARLP has declined -1.64%, versus a 3.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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