Alliance Resource Partners LP Stock Is Believed To Be Modestly Undervalued
- By GF Value
The stock of Alliance Resource Partners LP (NAS:ARLP, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $6.12 per share and the market cap of $778.4 million, Alliance Resource Partners LP stock appears to be modestly undervalued. GF Value for Alliance Resource Partners LP is shown in the chart below.
Because Alliance Resource Partners LP is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Alliance Resource Partners LP has a cash-to-debt ratio of 0.06, which which ranks in the bottom 10% of the companies in the industry of Other Energy Sources. The overall financial strength of Alliance Resource Partners LP is 4 out of 10, which indicates that the financial strength of Alliance Resource Partners LP is poor. This is the debt and cash of Alliance Resource Partners LP over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Alliance Resource Partners LP has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.3 billion and earnings of $0.3 a share. Its operating margin is 6.65%, which ranks in the middle range of the companies in the industry of Other Energy Sources. Overall, the profitability of Alliance Resource Partners LP is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Alliance Resource Partners LP over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Alliance Resource Partners LP's 3-year average revenue growth rate is worse than 82% of the companies in the industry of Other Energy Sources. Alliance Resource Partners LP's 3-year average EBITDA growth rate is -33.7%, which ranks in the bottom 10% of the companies in the industry of Other Energy Sources.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Alliance Resource Partners LP's return on invested capital is 4.09, and its cost of capital is 9.89. The historical ROIC vs WACC comparison of Alliance Resource Partners LP is shown below:
Overall, The stock of Alliance Resource Partners LP (NAS:ARLP, 30-year Financials) shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in the industry of Other Energy Sources. To learn more about Alliance Resource Partners LP stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.