Soaring demand and attractive, long-term government incentives and funding create solid tailwinds for the renewable energy industry this year and beyond. Rising demand is driven by an increasing need worldwide to transition to renewable energy to address climate change concerns and volatile fossil fuel prices.
Given the industry’s bright prospects, it could be wise to buy fundamentally sound renewable energy stocks Alliance Resource Partners, L.P. (ARLP), Steel Partners Holdings L.P. (SPLP), and Westlake Chemical Partners LP (WLKP), which have been gaining significant institutional investment traction lately.
Renewables, led by solar and electric vehicles (EVs), are expected to boost clean energy investment in 2023. Investments are propelled by various factors, including high and volatile fossil fuel prices, a strong alignment of global climate and energy security goals, and enhanced government support in strengthening the nation’s footholds in the emerging clean energy economy.
The Inflation Reduction Act (IRA) of 2022 allocates approximately $400 billion in federal funding to clean energy. With this legislation aimed at supercharging clean energy nationwide, an analysis from the National Renewable Energy Laboratory shows that the U.S. will get to around 80% clean electricity by 2030.
By 2035, federal analysis predicts that renewable sources will comprise approximately 86% of U.S. power, primarily spurred by the IRA.
Renewable energy investment hits a record-breaking $358 billion during the first six months of 2023, an increase of 22% compared to the start of last year, according to the latest investment data from BloombergNEF’s (BNEF) 2H 2023 Renewable Energy Investment Tracker report. Solar was the main driver of the stellar results in the first half of this year.
Moreover, a total of $239 billion was invested in large- and small-scale systems, accounting for two-thirds of total global renewable investment over the first six months of 2023 and resulting in a staggering 43% rise year-over-year. The U.S. invested $25.50 billion in large and small-scale solar during this year’s first half, marking an impressive 75% increase from the first half of 2022.
For the full year 2023, global renewable capacity additions are expected to grow by 107 gigawatts (GW), the largest absolute increase ever, to more than 440 GW, as per the International Energy Agency (IEA). Furthermore, global renewable capacity additions could reach 550GW in 2024.
According to a report by Mordor Intelligence, the U.S. renewable energy market size is projected to reach 636.44 GW by 2028, exhibiting a CAGR of 10% during the forecast period.
Given the industry’s tailwinds, fundamentally sound renewable energy stocks ARLP, SPLP, and WLKP, which are attracting smart money, could be solid buys now.
Let’s discuss the fundamentals of these stocks in detail:
Alliance Resource Partners, L.P. (ARLP)
ARLP is a diversified natural resource company that produces, markets and supplies energy domestically and internationally primarily to major utilities, metallurgical, and industrial customers. The company operates through Illinois Basin Coal Operations; Appalachia Coal Operations; Oil & Gas Royalties; and Coal Royalties segments.
Institutional shareholders own a 19.6% stake in ARLP. Also, the total value of its holdings amounts to $499 million.
On July 28, ARLP announced that the Board of Directors approved a cash distribution to its unitholders for the quarter that ended June 30, 2023. ARLP unitholders received a quarterly cash distribution of $0.70 per unit on August 14, 2023. This distribution represents an increase of 75% over the cash distribution of $0.40 per unit for the June 30, 2022 quarter.
The increase in cash distribution reflects the company’s strong financial position and is consistent with its long-term strategic capital allocation plans. ARLP’s annual dividend of $2.80 yields 13.98% on the prevailing share price, while its four-year average dividend yield is 13.50%.
ARLP’s trailing-12-month net income margin of 28.03% is 98.3% higher than the industry average of 14.13%. Also, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 46.03%, 24.03%, and 26.42% are significantly higher than the industry averages of 21.34%, 10.40%, and 8.06%, respectively.
ARLP’s revenues increased 3.5% year-over-year to $641.84 million in the second quarter that ended June 30, 2023. Its income from operations grew 3.7% from the year-ago value to $183.93 million. The company’s EBITDA rose 1% year-over-year to $249.24 million. ARLP’s free cash flow came in at $153.48 million, an increase of 88.7% year-over-year.
Furthermore, the company’s net income and earnings per limited partner unit were $171.31 million and $1.30, increases of 4.6% and 5.7% year-over-year, respectively.
Street expects ARLP’s revenue for the fiscal year (ending December 2023) to increase 11.3% year-over-year to $2.68 billion. The company’s EPS for the current year is expected to grow 24.4% year-over-year to $5.46 million. Moreover, ARLP has surpassed the consensus EPS estimates in three of the trailing four quarters.
Shares of ARLP have gained 5.6% over the past month to close the last trading session at $20.03.
ARLP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
ARLP has a grade of B for Value and Quality. Within the B-rated MLPs - Other industry, it is ranked first out of 8 stocks.
Beyond what we stated above, we also have ARLP’s ratings for Momentum, Stability, Quality, and Sentiment. Get all ARLP ratings here.
Steel Partners Holdings L.P. (SPLP)
SPLP, along with its subsidiaries, engages in energy, industrial products, defense, supply chain management, logistics, banking, and youth sports businesses across the world. The company operates through three segments: Diversified Industrial; Energy; and Financial Services.
SPLP exhibits substantial institutional ownership, with institutions owning around a 39.88% stake. Moreover, the total value of these holdings amounts to $383 million.
On August 9, SPLP’s Board of Directors declared a regular quarterly cash distribution of $0.375 per unit, payable on September 15, 2023, to unitholders of record as of September 1, 2023, on its 6% Series A Preferred Units. This reflects the company’s commitment to deliver value to its shareholders.
On May 1, SPLP and Steel Connect, Inc. (STCN) announced that Steel Partners and certain of its affiliates (the Steel Partners Group) had transferred certain marketable securities held by the Steel Partners Group to Steel Connect in exchange for 3.5 million shares of Series E Convertible Preferred Stock of Steel Connect.
The Preferred Stock would be convertible into an aggregate of 184,891,318 shares of Steel Connect common stock. Upon conversion of the Preferred Stock, the Steel Partners Group would hold nearly 85.12% of the outstanding equity interests of Steel Connect. This exchange transaction is expected to benefit SPLP significantly.
SPLP’s trailing-12-month gross profit margin of 35.03% is 15.5% higher than the industry average of 30.33%. And the stock’s trailing-12-month net income margin of 10.77% is 73.9% higher than the industry average of 6.19%. Also, its trailing-12-month levered FCF margin of 12.75% is 133.1% higher than the 5.47% industry average.
SPLP’s revenue increased 13.5% year-over-year to $500.90 million in the second quarter that ended June 30, 2023. The increase in revenue is driven by higher revenue from the Financial Services and Energy segments and favorable impact from the newly acquired Supply Chain segment. The company’s adjusted EBITDA rose 24.8% from the year-ago value to $73.60 million.
In addition, as of June 30, 2023, the company’s cash and cash equivalents were $353.16 million, compared to $234.45 million as of December 31, 2022.
SPLP’s stock has gained 6.1% over the past six months and 5.3% year-to-date to close the last trading session at $45.
SPLP’s POWR Ratings reflect this robust outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
SPLP has a B grade for Growth, Sentiment, Stability, and Quality. It is ranked #3 among ten stocks in the B-rated MLPs - Other industry.
To see additional POWR Ratings for Value and Momentum for SPLP, click here.
Westlake Chemical Partners LP (WLKP)
WKLP operates, acquires, and develops ethylene production facilities and related assets. Its ethylene production facilities primarily convert ethane into ethylene. Also, it sells ethylene co-products, including propylene, crude butadiene, pyrolysis gasoline, and hydrogen, directly to third parties. Westlake Chemical Partners GP LLC serves as the company’s general partner.
Institutions own nearly 30.16% of WLKP, suggesting that the stock has credibility in the eyes of smart money and the total value of holdings is around $239 million.
On August 1, WLKP announced that the Board of Directors of Westlake Chemical Partners GP LLC approved a quarterly distribution of $0.4714 per unit to be payable on August 25, 2023, to unitholders of record as of August 11, 2023. This represents the 36th quarterly distribution by the company since its initial public offering.
MLP distributable cash flow provided trailing-12-month coverage of 1.05x the declared distributions for the second quarter of 2023. WLKP pays an annual dividend of $1.89, translating to a yield of 8.40% at the current price level. Its four-year average dividend yield is 8.23%. The company’s dividend payouts have grown at a CAGR of 3.8% over the past five years.
WLKP’s trailing-12-month EBITDA margin of 34.58% is 100.4% higher than the industry average of 17.26%. Likewise, the stock’s trailing-12-month levered FCF margin of 27.99% is significantly higher than the industry average of 3.90%.
During the second quarter that ended June 30, 2023, WLKP reported net sales of $264.18 million. Net income attributable to Westlake Partners came in at $11.87 million and $0.34 per common unit, respectively. For the six months ended June 30, 2023, the company’s cash inflows from operating activities were $243.40 million, an increase of 7.9% year-over-year.
Analysts expect WLKP’s revenue to increase 6.7% year-over-year to $1.52 billion for the fiscal year ending December 2024. The company’s EPS for the same period is expected to grow 17.8% from the prior year to $1.91. Over the past three months, the stock has gained 4.3% to close its last trading session at $22.46.
WLKP’s solid prospects are reflected in its POWR Ratings. The company has an overall B rating, translating to a Buy in our proprietary rating system.
WLKP has an A grade for Quality and a B for Value and Stability. It is ranked #2 in the same industry.
Click here to access additional POWR Ratings of Sentiment, Growth, and Momentum for WLKP.
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ARLP shares were unchanged in premarket trading Thursday. Year-to-date, ARLP has gained 9.10%, versus a 16.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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