Alliance Resource Partners vs. Arch Resources: Which Coal Stock is a Better Buy?

Alliance Resource Partners, L.P. (ARLP) in Tulsa, Okla., 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 three segments: Illinois Basin; Appalachia; and Minerals. In comparison, Arch Resources, Inc. (ARCH) in  St. Louis, Miss., produces and sells thermal and metallurgical coal from surface and underground mines. The company sells its products to utility, industrial, and steel producers.

Last year, the coal industry was one of the worst-hit industries, owing to reduced global energy demand and weak commodity prices. However, the rising demand for coal with increased power usage and high natural gas prices, coupled with the continuing decline of utility stockpiles heading into the winter heating season, have driven a surge in coal prices. Transportation challenges and supply chain problems are also contributing to the rise in coal prices. In addition, domestic utilities have leaned on coal-fired power generation to meet rising electricity demand. And the continuing post-COVID economic recovery and reopening of the industrial sector should drive the coal industry's growth. Therefore, we think both ARLP and ARCH should benefit.

ARLP stock has gained 9.8% in price over the past three months, while ARCH has returned 1.4%. Also, ARLP’s 80.7% gains over the past nine months are significantly higher than ARCH’s 67.3% returns. And ARLP is the clear winner with 135.9% gains versus ARCH’s 90.1% returns in terms of year-to-date performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 25, ARLP announced that the board of directors of its general partner declared a cash distribution to unitholders of $0.20 per unit for the 2021 Quarter, payable on November 12, 2021, to all unitholders of record as of the close of trading on November 5, 2021. The distribution represents a 100% sequential increase.

On September 9, ARCH announced that it recently commenced production at its new Leer South longwall mine in Barbour County, W.Va. Paul A. Lang, ARCH's CEO and President said, "We expect Leer South to quickly become one of the most competitive metallurgical mines in the United States and serve as an essential feedstock for global steel production for the next two decades or more.”

Recent Financial Results

ARLP’s total revenue increased 16.8% year-over-year to $415.40 million for its fiscal third quarter, ended September 30, 2021. Its EBITDA grew 14.4% year-over-year to $135.90 million, while its net income came in at $57.50 million, representing an 111.4% year-over-year increase. Also, its EPS was  $0.44, up 109.5% year-over-year.

ARCH’s revenues increased 55.5% year-over-year to $594.40 million for its fiscal third quarter, ended September 30, 2021. The company’s adjusted EBITDA grew 656.3% year-over-year to $131.60 million, while its net income was  $89.10 million compared to a $191.50 million loss in the prior-year quarter. Also, its EPS was $4.92 compared to a $12.64 loss per share in the year-ago period.

Expected Financial Performance

Analysts expect ARLP’s revenue to increase 26.1% for the quarter ending December 31, 2021, and 17.4% in its fiscal 2021. The company’s EPS is expected to grow 155.6% for the quarter ending December 31, 2021, and 263.7% in its fiscal 2021.

In comparison, ARCH’s revenue is expected to increase 105.8% for the quarter ending December 31, 2021, and 47.5% in its fiscal 2021. Its EPS is expected to grow 723.6% for the quarter ending December 31, 2021, and 332.2% in fiscal 2021.

Profitability

ARCH’s trailing-12-month revenue is 1.18 times ARLP’s. However, ARLP is more profitable, with gross profit  and net income margins of 37.07% and 11.03%, respectively, compared to ARCH’s 19.18% and 1.87%.

Furthermore, ARLP’s 14.48%, 5.60%, and 7.28% respective ROE, ROA, and ROTC are higher than ARCH’s 8.32%, 3.10%, and 6.23%.

Valuation

In terms of forward non-GAAP P/E, ARLP is currently trading at 6.61x, which is 61.2% higher than ARCH’s 4.10x. Furthermore, ARLP’s 1.06x forward EV/S ratio is 39.5% higher than ARCH’s 0.76x.

So, ARCH is relatively affordable here.

POWR Ratings

ARLP has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast,  ARCH has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

ARLP has an A grade for Quality. This is justified given ARLP's 31.76% trailing-12-month EBITDA margin, which is 51.5% higher than the 20.97% industry average. In comparison,  ARCH has a Quality grade of C, which is in sync with its 12.82% trailing-12-month EBITDA margin, which is 38.9% lower than the 20.97% industry average.

Of the nine stocks in the A-rated MLPs - Other industry, ARLP is ranked first. But  ARCH is ranked #8 of 11 stocks in the B-rated Coal industry.

Beyond what I have stated above, we have also rated the stocks for Momentum, Value, Growth, Stability, and Sentiment. Click here to view all the ARLP ratings. Also, get all the ARCH ratings here.

The Winner

With the continuing reopening of the economy, rising international coal demand is pushing prices to record highs. So, both ARLP and ARCH are expected to gain. However, we think it is better to bet on ARLP now because of its higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the MLPs – Other industry here. Also, click here to access all the top-rated stocks in the Coal industry.

ARLP shares were unchanged in premarket trading Thursday. Year-to-date, ARLP has gained 158.55%, versus a 27.68% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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