A business connected to Natural Resource Partners LP (NYSE:NRP) Board member Christopher Cline purchased almost 760,000 shares from the company for $15 million (which comes out to a price of $19.82 per share). Natural Resource Partners is a $2.4 billion market cap company which primarily owns (and then leases) coal mines in the United States.
We track insider purchases because insiders start out with a close economic relationship to their company; the principles of diversification therefore suggest that they should avoiding increasing their dependence on it. As a result we think that insider purchases should indicate quite high confidence in the company, and we would add that studies have shown a slight outperformance by stocks that insiders buy. So insider purchases can serve as a screen for companies which might then by worthy of further research. Other insiders were buying shares of Natural resource Partners last summer at prices in the $20 to $22 range (see a history of insider purchases at Natural Resource Partners).
The coal industry can be divided into two verticals, both of which have been experiencing demand pressures. Thermal coal, which is used by utilities to generate electricity, has been increasingly replaced by natural gas as high production has driven prices of the commodity down (though this trend does appear to be slowing). Metallurgical coal is used to produce steel, which in turn depends on global macro conditions; poor numbers in Europe in particular have therefore rippled backwards through the supply chain to impact metallurgical coal producers. Natural Resource Partners’ coal assets include both types of coal, with metallurgical coal associated with just under half of the company’s coal royalty revenues.
Natural Resource Partners pays a dividend yield of about 10%, and the record of dividend payments is very strong. It generally hasn’t cut its payments, and though in recent years the rate of increase has been slow it doesn’t need to increase its dividend at all to be a potential income stock. We would note, however, that the stock price has fallen 21% in the last year. In terms of value, the stock trades at 18 times trailing earnings and 12 times analyst consensus for 2013. That’s not quite low enough to recommend it from a pure value perspective, but investors who put weight on yields should consider the stock.
Let’s look at other coal companies:
Other coal companies- though these are producers- include Cloud Peak Energy Inc. (NYSE:CLD), CONSOL Energy Inc. (NYSE:CNX), Peabody Energy Corporation (NYSE:BTU), and Arch Coal Inc (NYSE:ACI). Most of these stocks are down at least 10% in the last year; Arch Coal has fallen by nearly 50%. 2013 earnings multiples also tend to be quite high: Arch Coal is expected to be unprofitable this year, while the current-year P/Es for CONSOL and Peabody are close to 30. None of these stocks pay a yield of more than 2% and so they aren’t competitive with Natural Resource Partners on an income basis either. Cloud Peak, which is primarily a thermal coal provider, stands out as the general exception; its stock price down only slightly, its valuation at 12 times 2013 earnings estimates, revenue and earnings actually improving. Value investors who want to get into coal- and think the other companies in the industry are too dependent on a recovery in earnings- might consider it alongside Natural Resource Partners.
While hedge funds have been generally cool on Natural Resource Partners, they have been buying some of these peers and an investor could take that as an optimistic sign for the industry (since coal, at least within each segment, is more or less a commodity business). We’d note that billionaire George Soros was buying Peabody in the third quarter of 2012 (see more of Soros’s stock picks) and fellow billionaire T. Boone Pickens, normally an oil and gas investor, initiated small positions in both Arch Coal and CONSOL (find more stocks Pickens likes).
Disclosure: I own no shares in any stocks mentioned in this article.
