Why Alliance Resource Partners Stock Is Back on Investors’ Radar

Alliance Resource Partners (ARLP) has drawn attention after recent trading data showed a mixed return pattern, with the stock up over the past month but down over the past 3 months.

That split performance, alongside a last close of US$25.62 and a market cap of about US$3.3b, is prompting investors to reassess how the partnership’s coal operations and royalties business fit into a broader income and value-focused portfolio.

Recent trading shows a mixed picture, with the share price return up over the past month but down over the past quarter. The year to date share price return of 10% sits alongside a 5 year total shareholder return that is very large, which hints that momentum has cooled after a strong multi year run.

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So with ARLP trading at US$25.62, a reported intrinsic value gap of about 68% and a market value near US$3.3b, is the stock offering real value, or is the market already pricing in its future growth?

Price to Earnings of 13.5x: Is It Justified?

On a P/E of 13.5x against a last close of $25.62, ARLP screens as undervalued relative to both peers and the wider US Oil and Gas industry.

The P/E ratio compares the current share price with earnings per unit, so it tells you how much investors are paying today for each dollar of current profits. For a business like Alliance Resource Partners, which generates income from coal operations and royalties, this is a straightforward way to line up the stock against other cash generating companies in the same space.

ARLP is described as good value on several fronts, including its P/E of 13.5x versus a peer average of 21.4x and an estimated fair P/E of 18.6x. That gap suggests the market is pricing its earnings more cautiously than both comparable companies and the level indicated by the SWS fair ratio model.

Against the broader US Oil and Gas industry, where the average P/E is 13.8x, ARLP again comes in slightly lower at 13.5x. Coupled with its 5 year earnings growth of 7.2% per year and an assessment of high quality earnings, the discount points to a stock that is priced more conservatively than both its industry and what regression based fair value work implies.

Result: Price-to-Earnings of 13.5x (UNDERVALUED)

However, the coal focused business model and reliance on US$2,170.36m of domestic revenue leave the stock exposed to shifts in US power demand and regulation.

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Another View: What the SWS DCF Model Says

The P/E points to ARLP as undervalued, but the SWS DCF model goes even further. With the unit price at $25.62 and an estimated future cash flow value of $78.95, the DCF view also signals undervaluation, raising the question of what risks or assumptions might be holding the market back.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Alliance Resource Partners for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 49 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given this mix of potential upside and clear risks, it may be useful to act promptly, review the numbers on your own, and decide where you stand with 3 key rewards and 1 important warning sign

Looking for more investment ideas?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.