Domestic Coal Demand And Appalachian Mining Will Strengthen Market Stability

Key Takeaways

• Favorable domestic conditions could increase coal demand, revenue growth, improved earnings, and operational cost reductions in Appalachia, boosting net margins.
  
• Strategic commitments and capital expenditure cuts enhance free cash flow for debt reduction and reinvestment, stabilizing revenue and earnings.
  
• Declining coal volumes and prices, along with uncertain trade policies, threaten revenue, net margins, and earnings predictability amidst macroeconomic instability.

Catalysts

A diversified natural resource company, engages in the production and marketing of coal to utilities and industrial users in the United States.

• Alliance Resource Partners expects a higher level of domestic coal demand due to cold winter weather, increased natural gas prices, and declining coal inventories, leading to increased coal burn, which could drive revenue growth and improve earnings.
  
• The company anticipates improved mining conditions in Appalachia in the latter half of 2025, which should lead to lower operational costs and potentially increase net margins.
  
• A strategic focus on domestic utility solicitations has secured commitments for an additional 17.7 million tons of coal from 2025 to 2028, potentially stabilizing revenue streams and earnings.
  
• Planned capital expenditure reductions from $429 million in 2024 to $285-$320 million in 2025 could enhance free cash flow available for debt reduction or reinvestment, boosting net margins.
  
• The potential extension of coal plant life driven by favorable executive orders could increase electricity demand reliability, supporting steady coal consumption and potentially enhancing revenue and earnings stability.

Alliance Resource Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alliance Resource Partners's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $466.9 million (and earnings per share of $3.57) by about April 2028, up from $270.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $398.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 12.8x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

Alliance Resource Partners Future Earnings Per Share Growth

Risks

• Declining coal sales volumes and prices, particularly in export markets, and the challenging mining conditions in Appalachia could negatively impact revenue and pressured net margins.
  
• Lower realized oil and gas commodity prices, alongside reduced volumes, are impacting revenue in the company's royalty segment, presenting a risk to overall earnings.
  
• The uncertainty surrounding trade policies and potential supply chain disruptions could create volatility in costs and impact net margins and revenue predictability.
  
• A significant drop in net income year-over-year due to decreased coal sales volumes and prices and a reduction in the fair value of digital assets, posing a risk to future profitability.
  
• The overall uncertain macroeconomic environment and fluctuating trade policies might negatively impact capital allocation decisions, which could affect future earnings stability and growth.

Valuation

• The analysts have a consensus price target of $30.5 for Alliance Resource Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $466.9 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $27.07, the analyst price target of $30.5 is 11.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.