The booming global energy demand raises the issue of getting energy where it is needed. As such, pipeline companies emerge as problem solvers with their capability to transport energy products. Using the Embedded Expectations Analysis framework, today’s FA Alpha Daily will dig into what investors can expect from Enterprise Product Partners (EPD), one of the largest pipeline companies in the U.S.
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Thursday Uniform accounting analysis
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Energy demand is rising all across the world after the pandemic. Europe is looking for energy resources outside of historical Russian sources and the U.S. energy consumption is nearing its highest levels.
However, the biggest story in the energy patch over the past 8 months has not just been booming demand.
While the rising demand may be beneficial for the companies extracting fossil fuels out of the ground, there is another group of companies benefiting.
The biggest problem now facing the U.S. and Europe is getting energy where it needs to be from where it’s extracted from the ground.
Energy transportation faces challenges such as huge volumes being moved and the explosive nature of energy products.
The expense and difficulty in transporting crude oil products has driven mismatches in prices for natural gas, gasoline, and diesel around the world.
There is one group of companies that can help alleviate this issue: the pipeline companies.
One of the largest ones in the U.S. is Enterprise Product Partners (EPD). The company owns pipelines for oil, natural gas, natural gas liquids (“NGL”) and gets energy to where it needs to go.
Enterprise’s biggest segment changes depending on the year, but the NGL pipelines and services segment generated more revenue than other segments in the last two years thanks to continued advances in transporting NGL.
However, looking at the as-reported metrics makes Enterprise appear to be a sleepy, boring company no investor would want to get into.
In the last five years, the as-reported return on assets (“ROA”) has been stuck just around the cost of capital of around 5%.
However, these metrics fail to show the real performance of the company. This is due to distortions in as-reported accounting and can be fixed by making the over 130 adjustments needed under Uniform Accounting.
The reality is that Enterprise has a vital position in the industry and can charge healthy transportation fees.
This position helps the company generate profitability. Actually, its Uniform ROA has been above 10% for the past several years, reaching 14% in 2019 and staying at 12% in 2021.
Thanks to the shale renaissance and the need to get oil and natural gas to the rest of the world, the company has long-term tailwinds driven by the demand in its offerings.
Investors using as-reported metrics would not understand how these tailwinds allow Enterprise to make money.
Fundamentals of the company and macroeconomic developments make sense only when we clear the numbers using Uniform Accounting.
As-reported metrics hide the actual performance of companies, which leads to uninformed decision-making.
Uniform Accounting provides the right tools for investors to unlock the real value that the company offers. To learn more about how to gain access to the real numbers for almost 25,000 companies around the world, click here to read about our Uniform Accounting database.
SUMMARY and Enterprise Products Partners L.P. Tearsheet
As the Uniform Accounting tearsheet for Enterprise Products Partners (EPD:USA) highlights, the Uniform P/E trades at 13.8x, which is below the global corporate average of 19.3x, but around its own historical P/E of 14.2x.
Low P/Es require low EPS growth to sustain them. In the case of Enterprise, the company has recently shown a 3% growth in Uniform EPS.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Enterprise’s Wall Street analyst-driven forecast is a 17% and 1% EPS growth in 2022 and 2023, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Enterprise’s $27 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink by 6% annually over the next three years. What Wall Street analysts expect for Enterprise Products’ earnings growth is above what the current stock market valuation requires through 2023.
Furthermore, the company’s earning power in 2021 is 2x the long-run corporate average. However, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Also, the company’s intrinsic credit risk is 120bps above the risk-free rate.
All in all, this signals moderate credit and dividend risk.
Lastly, Enterprise’s Uniform earnings growth is in line with its peer averages, but the company is trading below its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.