Alpha Metallurgical Stock: Debt Free And Printing Cash (NYSE:AMR)

Alpha Metallurgical Resources Alpha Metallurgical Resources Alpha Metallurgical ResourcesNYSE:AMR), a leading player in the Metallurgical Coal industry, stands out in today’s investment landscape due to its straightforward business model and dedication to shareholder returns. The company’s recent financial discipline has been a testament to its ability to withstand volatile market conditions. Buy back stock and increase shareholder dividends.

At the moment, the company’s stock is trading at a relatively attractive price, both compared to its historical value as well as relative to other companies. This offers us an excellent opportunity.

Let’s get started.

Financial Results

AMR’s financial performance over the past few years shows a mix of strengths, challenges and a positive overall trend.

The company’s top line has grown strongly, with TTM revenues soaring by 34% to $3.94 Billion, an increase of 34% year-over-year.

This is due to the increase in coal demand that has been caused by A combination of improved economic activity and a limited response to supply is a recipe for success. Although the TTM chart appears to be a great one, there are some recent issues.

The company reported only $911 million sales in their latest quarter. This translates to $3.4 billion revenue per year, which is a decrease from the previous period.

The company’s most recent 10-Q report stated the following:

For the three-month period ending March 31, 2023, coal revenues fell $163,0 million (15.2%) compared with the previous year. The decrease in coal revenues was due to lower coal realizations within the Met segment. Prices have moderated since the prior year.

The company is basically saying that 2022 was a very hot year, but 2023 will be a bit more moderate. When comparing the long-term sales trends of the company with those of its competitors, this makes sense.

Met Coal’s demand will be supported by an increase in the expected steel output.

The World Steel Association’s (“WSA”) most recent Short Range Outlook projects a 2.3% rebound in steel demand this year, bringing expected global demand to 1.82 billion metric tons. The organization anticipates steel demand to be 1.85 billion metric tonnes in 2024. A further increase of 1,7% is expected, led likely by manufacturing, and accelerated growth in most areas, with the exception China, where WSA predicts a slowdown due to population loss.

The overall demand profile for AMR’s end product seems to be holding up fairly well, despite some moderating factors.

The key is how AMR has used the recent spoils of their boom.

Here is AMR’s Cash Flow Statement:

The company used a large amount of its cash flow to pay dividends and settle debts.

The company has taken home 1,13 billion dollars in free cash flow during the past 12 months.

When you look at the big picture, the company has essentially no debt, solid FCF of 29% and minimal additional capex in its core business.

There will be bumps in the road, but the company has a great future and is well-positioned to deliver returns to its shareholders.

After tax, after the revenue is received, the company has a 34% operating profit margin, which includes all operating costs, CAPEX and depreciation. The remaining money goes to dividends and buybacks. No debts to pay, no big capital expenses, and a streamlined & straightforward basis for returns.

One final point to make is that coal has been viewed by many as a business on a permanent decline. AMR’s Met Coal is doing well and should continue to be able to return capital to its shareholders for many years to come. Met Coal stands out from Thermal Coal which is only produced as a byproduct and only represents 10% revenue. Thermal Coal’s demand is declining, while Met Coal continues to be in high-demand.

Valuation

AMR is attractive when it comes to valuation. The stock is trading at an attractive valuation.

The current market value may not be the true value of a company if you take a closer look at its historical valuation.

At these prices, it is clear that the market anticipates a significant fall in Met Coal’s prices. This would reduce margins, particularly compared to AMR’s fixed cost basis. This would reduce the immediate capital return to shareholders. We have already mentioned that global steel consumption is expected to increase slightly in this year as well as the future. Therefore, we think this stock has been mispriced by the market.

AMR is priced too high compared to itself and its industry:

Chinese housing is the only negative aspect to mention.

China was a primary source of demand for global steel for a long period of time. But the numbers in recent years have been horrendous. The company is currently 119 millions square meters behind where they were this time last, and the trend continues to worsen.

It’s unclear if other countries can take up the slack if things go south in China. Although this is primarily a problem for the steel industry to solve, it may have an impact on input prices like Met Coal.

AMR’s business model is streamlined and it has a high potential for return. Therefore, the market’s valuation is too low. AMR could be rerated higher.

Risques

We think that the stock setup is excellent, but it is important to understand the risks involved in owning this company. Some of the main risks to consider are:

MacroAMR is exposed to macroeconomic risks that include economic downturns, changes in government policies and other factors.

ExecutionIf the company does not execute well, or if costs are allowed to spiral out of control, margins can shrink dramatically, which will affect the capital returns for shareholders and the stock price.

Commodity-linkedAMR’s revenue is based on the Met Coal price. The volatility of the price could have a direct impact on the profitability of the company and ultimately its stock price.

Technical SentimentsThe stock is strong, going from a recent low of around $3 to a recent high in the range of $183. It is clear that the company has evolved since 2020. But some people may still view the stock as overbought, especially in longer-term timeframes. This may make gains near term difficult.

You can read more about it here:

Alpha Metallurgical Resources is a great opportunity for investors who want to take advantage of the company’s debt-free status and its solid margins.

AMR presents an excellent investment opportunity. With a price well below the historical average, a good entry point for the stock, a potential return on total capital, and a balance between risk and reward, AMR has many positive attributes.