The
royalty rate “negotiation” between QUALCOMM and Nokia/Broadcom overshadows
positive news of QUALCOMM’s business progress. At the GSM World Congress
in Barcelona
over the week of February 12th, two important announcements were made.
First, the GSM Association completed its contest for the “3G for All” phone,
choosing an LG phone powered by a QUALCOMM WCDMA chipset. This should be
very constructive to QUALCOMM’s WCDMA chipset market share. How the
telecom world has changed! A few years ago QUALCOMM was not welcome at
GSM Association events, let alone being chosen by 12 world GSM operators as the
supplier of chipsets to their universal handset. Secondly, ATT
Wireless/Cingular chose QUALCOMM’s MediaFLO as its mobile broadcast TV
standard. Since Verizon has also chosen MediaFLO, this effectively makes
it the U.S.
standard, and will influence the choice of the mobile broadcast TV standard
worldwide.
Coal
The
United States
has 267 billion tons of coal reserves, according to the U.S. Department of
Energy - equivalent in energy storage to over 80% of the whole world’s oil
reserves. At the current consumption rate of 1.1 billion tons per year
that would be enough to power this country for 240 years. Coal is the
least expensive fossil fuel on a dollars-per-million-Btu basis at about $3.00,
compared to about $10.00 for oil or natural gas. This price differential
is contributing to significant growth in the number of new coal-fired power
plants. The Department of Energy expects 120 million tons per year of
additional coal demand by 2010 and 300 million by 2015.
Passage of the Energy Policy Act of 2005 reinforced coal
as the fuel of the future in the U.S. It authorized $1.8
billion for the Secretary of Energy to enforce the Clean Coal Power Initiative
and provided $3 billion in funding for deployment of pollution control
equipment for coal-fired generation units. In response, electric
utilities announced commitments for numerous new “scrubber”
installations. Scrubbers remove particulate matter and sulfur from coal
emissions. This, in turn, allows utilities to cleanly burn lower priced high
sulfur coal, leading to a shift in coal sourcing from Central Appalachia to the
Illinois Basin
and Northern Appalachia. This creates an
investment opportunity in Alliance Resource Partners. Alliance operates mines east of the Mississippi River,
with 70% of production from the Illinois
Basin and the remainder from Central
and Northern Appalachia.
In
addition, higher energy prices have driven a renewal of interest in coal gasification,
in which finely ground coal is converted into a gas, cleaned of pollutants, and
then fed into a turbine. Coal conversion reduces or eliminates carbon
dioxide emissions. Even after the expense of gasification, coal is a much
cheaper source of energy than oil and/or natural gas. Environmental
activists and PacifiCorp in Oregon
have developed an “environmental tariff.” “When we evaluate [the cost of]
coal-fired resources, we add an additional $8 per ton [of carbon dioxide
emissions] for the carbon risk“ said Don Furman,
PacifiCorp’s senior vice president for regulatory and government affairs.
Coal alone currently costs $30 to $60 per ton, depending on sulfur content.
The U.S. Department of Energy is building a prototype zero-emissions coal-fired
power plant, called FutureGen, to demonstrate environmentally-friendly
energy independence. Economically interesting to investors is the
National Coal Council’s prediction that clean coal technology will lead to a
doubling of U.S.
coal demand by 2030. Looking beyond the U.S., the Department of Energy’s
International Energy Outlook projects worldwide coal demand to double by 2030.
Alliance
Resource Partners (ARLP 35) is the best managed coal company in the U.S.
It stands above its peers when evaluated by metrics of management quality, such
as persistence of earnings growth and distribution of those earnings to
shareholders. The company just concluded seven consecutive years of
record results, growing revenues at a compounded rate of 16.5% over that
period, despite the challenges from a commodity business. It is the low
cost operator and profit margin leader of the coal sector. Management has
strategically positioned the company for growth by developing cheaper sources
of coal. The company’s safety track record and incentive-based wage
packages have resulted in a highly productive non-union workforce. Alliance is the employer
of choice in the towns in which it operates.
Alliance Resources has seven
large development projects in the Illinois
Basin and Northern
Appalachia that will drive growth as customers shift to scrubber
quality coal. Alliance Resource Partners has set a goal of increasing its
annual coal production from 24.4 million tons in 2006 to 38 million tons in
2010. The amount of profit growth from this large volume increase will be
greatly influenced by coal prices, which have
historically been difficult to predict. Also, management is transitioning
away from long-term contract pricing, which will increase the company’s
exposure to market prices for coal. The company earned $4.03 per
partnership unit in 2006. Combining increased high sulfur coal demand
with management’s record of increasing production volume supports the possibility
of $6.00 earnings five years from now. This drives an intrinsic value
estimate in excess of $45 per limited partnership unit. The units
currently yield over 6%. One negative of owning the units is that taxable
accounts must file a K-1 with the IRS. (This does not affect
non-taxable accounts, such as retirement plans.)
Steven L. Ré,
CFA
February 20, 2007
This report contains the
current opinions of the author and such opinions are subject to change without
notice. It has been distributed for information purposes only and is not
to be construed as a recommendation to purchase or sell securities. The
information contained herein is from sources deemed reliable but is not
guaranteed. It should not be assumed that investments in any of the
above-mentioned securities will be profitable, and past performance is no
guarantee of future results. Earnings projections often miss and markets
go up and down. The employees and families of Quality Growth Management,
Inc. may own the above-mentioned securities in their own accounts, and may
trade them at any time without notice.