Alliance Holdings: Top Pick in Coal

11/01/2013 8:00 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

With a high-yield and strong growth rate, this outfit is the safest play in the coal sector, suggests Igor Greenwald, editor of MLP Investing Insider.

The coal mining industry remains in the penalty box, but Aggressive Portfolio holding Alliance Holdings GP (AHGP) continues to score, thanks to its low costs and long-term supply contracts.

Alliance Resources Partners (ARLP), the master limited partnership for which AHGP serves as the general partner, and from which it derives all its revenue, reported a 5% year-over-year revenue gain for the latest quarter, while its earnings before items jumped 24%, boosted by a charge a year ago.

And while ARLP raised its distribution 8.3% year-over-year, the new $3.23 annualized distribution rate set by AHGP works out to a 12.2% year-over-year raise, as well as a 5.5% yield, based on the current unit price.

CEO Joseph W. Craft III said market conditions for coal remain "difficult" as a result of intense competition, mild weather, and "a stagnant economy in critical coal-burning regions," though he continued to predict an improvement next year, when several new mines should bolster the coal miner's profits.

In the meantime, that 5.5% yield and the double-digit distribution growth rate are backed by a healthy distribution coverage ratio of 1.55 times, up from 1.45 times a year ago. Debt remains modest at 1.14 times trailing Ebitda.

AHGP remains the safest coal play, as evidenced by its outperformance relative to coal stocks in recent months, with plenty of leverage should prices and demand improve. Buy AHGP below $68.

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