Rising Demand And Investments Will Improve Future Productivity In The Coal Industry

Key Takeaways

• Persistently low natural gas prices and difficult mining conditions may hamper revenue growth and profitability due to pricing pressures.
  
• Increasing production costs and regulatory challenges could strain net margins and future earnings due to operational inefficiencies.
  
• Strategic investments and increased demand indicate potential revenue growth, improved productivity, reduced expenses, and stabilized earnings despite market challenges.

Catalysts

A diversified natural resource company, produces and markets coal primarily to utilities and industrial users in the United States.

• Persistently low natural gas prices, low export market activity, and difficult mining conditions at the company's Appalachia operations could negatively impact future revenue growth, especially if pricing pressures continue.
  
• Expected decreases in coal sales price per ton, combined with increasing segment adjusted EBITDA expenses per ton sold, suggest that future net margins might come under pressure, affecting profitability.
  
• The company's anticipation that total coal volumes and realized sales prices will be closer to the lower end of their respective ranges, coupled with expected high adjusted EBITDA expenses per ton, indicate potential headwinds for earnings improvement.
  
• Increased production costs due to challenging mining conditions and expected operational delays, such as longwall moves being pushed to 2025, are likely to put further strain on net margins and earnings.
  
• Regulatory challenges or changes, such as potential new environmental regulations, could impact operational efficiencies and increase costs, thereby negatively affecting future financial performance and net margins.

Alliance Resource Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alliance Resource Partners's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.1% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $459.6 million (and earnings per share of $3.51) by about December 2027, up from $449.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2027 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Alliance Resource Partners Future Earnings Per Share Growth

Risks

• The proactive steps to align production with shipments and improvements in coal sales shipments, both domestically and on the total scale, indicate that revenue generation has potential for growth despite challenging market conditions.
  
• Strategic investments in capital and infrastructure projects at operations are set to improve productivity and reduce expenses, potentially enhancing net margins in the upcoming years.
  
• The company's activity in oil and gas royalty segments, particularly in the Permian Basin, has shown a year-over-year and sequential increase in volumes. This diversification and expansion, despite lower prices, could stabilize or boost earnings.
  
• The increase in committed tonnage for 2025 and ongoing discussions with customers suggest strong long-term contracts and customer demand which could positively impact future revenue and earnings.
  
• Investments in safety and production improvements have resulted in improved safety records, suggesting potential decreases in operational costs and improvements in operational efficiency, positively influencing net margins.

Valuation

• The analysts have a consensus price target of $27.5 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 2027, revenues will be $2.6 billion, earnings will come to $459.6 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of $26.03, the analyst's price target of $27.5 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.