Earnings Notes IV (Q4 2023)

Alpha Metallurgical Resources, Inc. (AMR)
Alpha Met is the largest U.S. met coal producer, representing about one-fifth of total U.S. production. According to their recent investor presentation, 71% of AMR's met coal production is exported, with India accounting for 37% of their export sales over the past five years.

The market capitalization of AMR is now $5.7 billion after earnings. AMR stock has been on an absolute tear since they are allocating lots of cash to share repurchases. (Up 151% since we mentioned last March.) Their current assets less total liabilities (ignoring deferred taxes) are now $255 million, so we would put the enterprise value at just under $6 billion.

For the fourth quarter of 2023 (release, 10-K), AMR's adjusted EBITDA was $266 million and for the full year (2023) it was $1 billion. That puts the EV/EBITDA at about 5.8x. AMR sold 4.6 million tons of met coal in Q4, 18% more coal than the prior year quarter. They got $184/t for met coal versus $155/t the previous quarter. Their cost of met coal sales was up slightly to $119 per ton from $110 per ton the prior quarter.

Cash from operations was $199 million and capital expenditures were $62 million for the quarter, for $137 million of free cash flow, an annualized yield on the enterprise value of 9%. That seems somewhat rich, especially compared with the FCF/EV yields of a coal royalty owner like Pardee, Beaver Coal, or Natural Resource Partners.

AMR had said that they were going to cease paying and focus their cash on share repurchases, "as long as buybacks make sense from a market, trading price, and valuation perspective." They paid $13 million of dividends for the fourth quarter and bought back $137 million of stock, for a shareholder yield of 10.5% (annualized) on the current market capitalization. They shrank the share count by 17% year-over-year!

AerCap Holdings N.V. (AER)
We mentioned aircraft lessor AerCap way back in the "What I Would Buy Instead of Tesla" post in October 2020. At that point the market capitalization was $3.3 billion, which was only a third of book value. They had $35 billion of aircraft (at book value net of depreciation), $10 billion of other assets, and $35 billion of debt, for a net of $10 billion of shareholder equity. It was trading for 3x earnings and we said, "If lots of airlines go bankrupt, this is a zero. If things return to normal, it's worth close to triple."

The market capitalization is now $16 billion and the share price did in fact triple. The share count and market capitalization grew in March 2021 when AER acquired GE's aircraft leasing business (GE Capital Aviation Services) for cash and stock. The other big development was when Russia invaded Ukraine, 152 AER aircraft were stranded in Russia. However, settlements were received from various Russian airlines and insurance companies.

Looking at the 2023 results, book value has grown to $16.6 billion as of year-end 2023. AerCap has $57 billion of "flight equipment," $14 billion of other assets, $46 billion of debt, and $8 billion of other liabilities. So the shares are now at 1x book value.

In 2023, AER earned $3.1 billion. Note that there were $1.3 billion of recoveries related to the Russian planes, so a real steady-state number would obviously be lower. Operating cash flow for the year was $5.3 billion. They spent $4.1 billion (net) on new aircraft and aircraft downpayments. They spent $2.6 billion on share repurchases which was more than their free cash flow, however they have some float from things like security deposits received from customers. With the $2.6 billion of repurchases, they shrank the share count by 18% during 2023.

We like specialty finance businesses with barriers to entry. Another example would be Burford (BUR). Good luck starting an aircraft leasing company; it's not like opening a bank to make mortgages at 4%. The concerns that we have with AER are the leverage (assets 4.4x their equity) and the China risk. They have 16% of their planes on lease to Chinese airlines so in the event of a Taiwan conflict, they could have a massive hole blown in their balance sheet. Why does China need to finance its planes with western capital, anyway?

Lamar Advertising Company (LAMR)
The reason that we initially became interested in Lamar was its high free cash flow margins - the signature feature of a "royalty-like" business.

The market capitalization of Lamar at $108 per share is $11 billion and the enterprise value is $16 billion. During the fourth quarter of 2023 (release), the company reported operating cash flow of $254 million, which was up 4% from the prior year quarter. This quarter's operating cash flow yield on the enterprise value (OCF/EV) annualizes to 6.4%.

Revenue for the quarter was $556 million, which was up 4% from the prior year quarter. Notice that Lamar enjoys a healthy operating cash flow margin of 46% of revenue. The quarterly dividend of $1.25 per common share was a total of $128 million returned to shareholders, a 4.6% dividend yield. (As a REIT, Lamar is required to distribute 90% of earnings to shareholders.)

For the entire year 2023 (10-K), Lamar generated $784 million of cash from operations (37% of revenues). The company reinvested $317 million in acquisitions and capital expenditures and paid $511 million in distributions to shareholders.

Let's compare Lamar's results for the year 2023 with those of 2018 (five years ago). Their shares outstanding have grown only 3% in five years, revenue has grown 30% (a bit better than the 25% PPI inflation), and cash from operations has grown 39%.

So, cash from operations per share went from $5.70 to $7.67, an increase of 35%. It is nice that this is comfortably outpacing PPI inflation. Obviously, CFO is different than free cash flow because it ignores both maintenance and growth capital expenditures, but by using CFO we normalize for the different levels of growth expenditures over time. And billboards do not exactly require tons of maintenance. (They actually said on the Q4 2023 earnings call that maintenance capex is $50 million in 2024 which is less than $500 per billboard.)

Management also mentioned on the call that they think that M&A and consolidation is going to "accelerate" over the next 18 to 36 months.

ONEOK, Inc. (OKE)
The market capitalization of ONEOK is $42 billion, not quite as big as Enterprise Products ($60B) or Enbridge ($73B). You may recall that OKE acquired our Magellan Midstream last year. For 2023, OKE earned $2.7 billion, generated $4.4 billion of operating cash flow, spent $1.6 billion on capital expenditures, and paid $1.8 billion of dividends. Earnings were obviously up significantly over 2022 thanks to the Magellan acquisition, which was funded with both cash and stock. Since the acquisition closed in September 2023, the best proxies that we have for the going-forward results are the Q4 2023 and management's guidance for 2024. Guidance in the investor presentation is for $2.6 to $3 billion of net income, $5.9 to $6.3 billion of adjusted EBITDA, and somewhere near $2 billion of capital expenditures, mostly for growth.