We are going to examine two companies which could make for good long-term investments. The first play is Kinder Morgan Energy Partners (KMP), and the second play is Apache Corp (APA). Both plays are in the basic material's sector. Apache Corp appears to be in the process of putting in a bottom, and the recent BP acquisitions, the deal to acquire Marin Energy and the deal where Apache purchased a portion of Devon Energy's (DVN) Gulf of Mexico's assets should help improve earnings going forward. Kinder Morgan Energy Partners sports a very lovely yield of 6.3% and has consecutively increased the distributions for 15 years in a row. The company's portfolio has expanded with the addition of a portion of El Paso Natural Gas and Tennessee Gas Pipeline. Zacks has 3-5 year estimated EPS growth rate of 21%.
We are going to examine both plays from a fundamental and technical perspective, starting off with Kinder Morgan Energy Partners.
Reasons to consider Kinder Morgan Energy Partners:
- The company's portfolio has expanded with the addition of a portion of El Paso Natural Gas and Tennessee Gas Pipeline. These assets were acquired from its parent company Kinder Morgan Inc (KMI).
- Management has planned the extension of the Trans Mountain pipeline. The company expects to file regulatory applications towards the second half of 2013 and to be commissioned in 2017. This project would increase the capacity to 750,000 bpd from the current 300,000 bpd.
- A great yield of 6.3%
- Zacks has a projected EPS growth rate for the next 12 months of 29% and an estimated 3-5 year EPS growth rate of 21.5%.
- A decent quarterly revenue growth of 10.4%
- A good operating margin of 27%
- It increased its quarterly cash distribution in the 3rd quarter to $1.26 per unit. This represents a 9% increase over its third quarter 2011 cash distribution of $1.14 per unit.
- A strong five-year dividend growth rate of 6.8%
- A good interest coverage ratio of 4.20.
- It recently concluded a 25-year natural gas transportation deal in connection with plans to build a pipeline in Mexico. The pipelines construction remains subject to approval. The company plans to file applications for the necessary permits next year.
- Consecutive dividend increases for 15 years.
- A very strong quarterly earnings growth rate of 76%.
Data and charts of interest
When a stock is trading above the EPS and EPS consensus estimate line, it is a bullish phase, and the outlook is for higher prices. The stock is trading above the EPS consensus line and so the current pullback could be a good time to open up a long-term position.
According to Fast Graphs, Kinder Morgan Energy Partners has an estimated earnings growth rate of 21.5%.
As the markets are in the seasonally bullish period of the year, it is likely they will continue to trend higher until the end of the year. As a result, KMP will most likely trade in the $78.00-$86.00 ranges. There is a strong amount of resistance in the $86.00-$88.00 ranges, and ultimately, we think it will test its lows in the $75.00$76.00 ranges before trading to new highs. On the other hand, a break below $70.00 will signal that the stock is ready to test its two years in the $63.50-$64.00 ranges.
Consider waiting for a test of the $74.00-$75.00 ranges before committing new money to this play. An alternative strategy would be to sell puts at strikes you would not mind owning this stock at. If the shares are assigned to you, you will get in at a price of your choosing. If the shares are not put to your account, you at least get paid for your efforts.
Reasons to consider Apache Corp
- Zacks has a estimated 3-5 year EPS growth rate of 5.2%
- Zacks has a target price of $90.00. The current price of $75.00 might prove to be a good long-term entry point.
- A strong interest coverage ratio of 13.00
- It has continued to increase its asset base in Australia. Operations from Australia should help provide a significant boost to free cash flow growth in the years to come.
- A healthy operating margin of 43%
- A strong positive levered free cash flow of $972 million
- The recent BP (BP) acquisitions, the purchase of a portion of Devon Energy's GoM (Gulf of Mexico) assets, and the deal to acquire Marin Energy will help compliment the company's asset base and contribute to earnings going forward.
- According to Zacks EPS is projected to increase from $9.86 in 2012 to $10.54 in 2013.
- Five year sales growth rate of 11.5%
- A manageable long term debt to equity ratio of 0.36
- Sales are expected to grow by 8.10% in 2013
- It had sales growth rate of 4.6% per annum for the past five years and analysts are projecting growth rates of 5.2% per annum for the next five years.
- A very low payout ratio of 10%
- Cash flow should improve from its operations in Australia, which it has been growing steadily over the past few years.
- A very high retention rate of 90%
Apache is trading below the EPS consensus line, but the EPS line has started to trend upwards, and analysts are projecting growth rates of 5.2% per annum for the next five years. The stock is also trying to put in a bottom. Early players could be well rewarded for establishing a position now.
The orange line represents the valuation growth rate line. When a stock is trading below this line and in the shaded green area, it represents a good long term entry point.
The break below $80.00 has turned this zone of former support into resistance. A weekly close below $75.00 will most likely result in a test of its two year lows at $73.00. If it does trade down to this level or below but finishes the day on a positive note, it will have completed a double bottom formation. Double bottom formations are bullish developments and indicate the stock is ready to trend higher. On a positive note, a weekly close above $80.00 will signal that it is ready to test the $85.00-$87.00 ranges.
At the moment, it is trying to put in a bottom. If this bottom is to hold it cannot close below $75.00 on a weekly basis. The short-term trend is still down. Consider waiting for a test of the $73.00 ranges before committing fresh money to this play.
Even though the markets are trending upwards, we feel that there is still one more leg down before they are ready to trend to new highs. Thus, investors should consider waiting for both stocks to pull back to the suggested ranges before committing new few funds to either play. One other alternative would be to sell puts at strikes you would not mind owning the stock at. If the shares are put to your account, you get in at a price of your choosing. If the shares are not put to your account, you at least get paid for your time.
Zacks consensus estimates and EPS charts obtained were obtained from zacks.com.
It is imperative that you do your due diligence and then determine if the above plays meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.