Kinder Morgan (NYSE: KMI) owns or operates nearly 40,000 miles of pipes across the continent. These pipelines extend to 180 terminals. Currently priced at $15.32,
Kinder Morgan has traded in a 52-week range of $14.82 to $21.92. The company has underwhelmed across the past year, providing a paltry return on equity. KMI’s performance has been particularly poor compared to the rest of the industry.
Bank of America recently upgraded KMI from a neutral rating to a buy rating with a $20 price target. Reaching $20 would be quite the considerable jump from KMI’s current level of $15 and change. Reuters analysts overwhelmingly rated the company a strong buy or at least a buy. No analysts surveyed about KMI rated the company as a sell. However, Wells Fargo recently reduced KMI’s price target to $20 from $21. All in all, the mean price target for KMI is a whopping $22.
So, what does this mean for potential investors? Let’s take a look:
KMI by the Numbers
KMI has a trailing P/E ratio every potential investor should be aware of: 188. This figure makes it challenging to make a case to invest in KMI even though analysts are projecting upwards of a 20 percent long-term growth rate. The company’s GAAP earnings are certainly disappointing. Bulls point to the fact that the company’s ’17 free cash flow was in excess of $1.4 billion. The company’s price-to-book-value ratio is a little over one. KMI’s debt-to-equity ratio is at 108 percent. This is a relatively balanced ratio. KMI is clearly capable of generating more profit without requiring an abundance of debt.
Making the Case for KMI
KMI’s assets include the continent’s most expansive natural gas network. Potential competitors face an uphill battle to compete with this pipeline powerhouse. Do not be scared away by the stock’s poor performance. The company has reported fairly good news across recent months. As an example, KMI’s fourth quarter results were better than the guidance range. As a result, the company paid a dividend yield of 3.1 percent. KMI also funded three billion dollars worth of expansion efforts. The company was in such a good financial position that it was able to repurchase a quarter-billion dollar worth of its low-priced stock.
KMI’s expansion projects will help the company get off to a roaring start to the year. The company anticipates generating more than $4.5 billion this year. This figure represent a 3 percent increase from the year prior. This revenue would be enough to finance more than two billion dollars worth of new projects. Furthermore, the company could pay a dividend 60 percent higher than the year prior and still have half a billion dollars remaining to invest in other projects. The company’s management might even make the decision to buy back even more of the stock.
What do the KMI Bears Have to Say?
The picture is not completely rosy for KMI. The company’s up-and-down business history is concerning. KMI ran into trouble in ’15 when the oil market hit a lull. Company executives got the leverage issue under control, moving the ratio toward a much more stable level yet shares of the company’s stock were still down this past year. Cash flow is consistent and other metrics seem solid. The problem appears to be the leverage target. KMI’s leverage target is comparably high when juxtaposed against industry competitors.
Buy, Sell or Hold?
Though KMI’s earnings are down on a year-over-year basis with nearly a 50-cent loss-per-share, the disappointing numbers can be blamed on tax reform changes. All in all, the company’s adjusted quarterly earnings to end ’17 were up nearly 20 percent on a year-over-year basis. KMI’s fundamentals continue to improve as time progresses. Look for the company to hover between $15 and $20 for the remainder of the year. If KMI eclipses the $20 mark by year’s end, consider taking a portion of your profits off the table.
If you do not currently own KMI, it is time to buy. The company’s numbers just keep getting better and better with each passing quarter and year. There is significant value at the moment as KMI’s stock is trading at about eight times its cash flow. Hop on board, ride the KMI train to $20 and re-evaluate your position at that point.
Regards,
Ethan Warrick
Editor
Wealth Authority
