A Side-by-side Analysis of Alliance Resource Partners, L.P. (ARLP) and Aon plc (AON)

Alliance Resource Partners, L.P. (NASDAQ:ARLP) shares are down more than -39.45% this year and recently decreased -1.59% or -$0.17 to settle at $10.50. Aon plc (NYSE:AON), on the other hand, is up 40.07% year to date as of 11/29/2019. It currently trades at $203.61 and has returned 2.42% during the past week.

Alliance Resource Partners, L.P. (NASDAQ:ARLP) and Aon plc (NYSE:AON) are the two most active stocks in the Industrial Metals & Minerals industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ARLP to grow earnings at a -6.83% annual rate over the next 5 years. Comparatively, AON is expected to grow at a 11.98% annual rate. All else equal, AON’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 24.94% for Aon plc (AON). ARLP’s ROI is 19.60% while AON has a ROI of 14.00%. The interpretation is that ARLP’s business generates a higher return on investment than AON’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. ARLP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.30. Comparatively, AON’s free cash flow per share was +2.66. On a percent-of-sales basis, ARLP’s free cash flow was -1.92% while AON converted 5.78% of its revenues into cash flow. This means that, for a given level of sales, AON is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. ARLP has a current ratio of 1.10 compared to 1.00 for AON. This means that ARLP can more easily cover its most immediate liabilities over the next twelve months. ARLP’s debt-to-equity ratio is 0.55 versus a D/E of 2.11 for AON. AON is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ARLP trades at a forward P/E of 12.65, a P/B of 1.01, and a P/S of 0.67, compared to a forward P/E of 19.72, a P/B of 13.81, and a P/S of 4.39 for AON. ARLP is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ARLP is currently priced at a -38.24% to its one-year price target of 17.00. Comparatively, AON is 0.13% relative to its price target of 203.35. This suggests that ARLP is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ARLP has a beta of 0.89 and AON’s beta is 0.84. AON’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. ARLP has a short ratio of 4.17 compared to a short interest of 1.90 for AON. This implies that the market is currently less bearish on the outlook for AON.

Summary

Alliance Resource Partners, L.P. (NASDAQ:ARLP) beats Aon plc (NYSE:AON) on a total of 8 of the 14 factors compared between the two stocks. ARLP is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, ARLP is the cheaper of the two stocks on an earnings, book value and sales basis, ARLP is more undervalued relative to its price target.