Over a year ago we wrote an article examining the growth prospects of Enbridge (ENB) and we purchased shares soon after and sold them for a healthy gain in April 2013, just after the 52-week high of $48.65 at a little below $ 46 per share. However we decided not to let it remain in our dividend growth portfolio as the financials just do not meet the qualities of a Buffett-esque stock.
Between 2011 and 2012 Enbridge saw a year-over-year decrease in revenue of 6.5% after a 72.6 and 25.7% increase in the previous two years. Gross profit saw a similar trend , declining 6.6% in 2012, after increases of 44.6 and 18.3% in 2010, and 2011, respectively. Simultaneously, their gross profit margins have reached their lowest level since 2008 at 21.8% compared to 20.7%. This is a significant decline from the almost 28% gross profit margins seen in 2009. Compare these with the Buffett ideal of 60% or greater.
2012 also saw the highest levels of SGA expenses as a percent of gross profit at 52.4%, up significantly from the ~40% it had been hovering at during the previous four years. Likewise, the depreciation, amortization and depletion expenses were running at almost 22% of gross profit in 2012, comparable to previous years. Interest expenses as a percentage of operating income also increased to 55.6% in 2012, higher than the 35.3% seen the previous year, but lower than the 65.2% seen in 2010. All three of these expenses are higher than what is acceptable for a company with durable competitive advantage.
When we look at the year-over-year net income increase, the problems with ENB become even more apparent. The last time ENB showed an increase in net income was 17.6% between 2008 and 2009, but since then it has declined at 39.1, 12.4, and 14.2% annually for 2010, 2011 and 2012 respectively. The results of this are that in 2012 the net profit margin was only 2.83%, down from the recent maximum of almost 13% in 2009. The most recent two years have also shown 12% and 17% decreases in retained earnings respectively; the first recent years where retained earnings have not increased! When the earnings per share are compared over the previous years, a decline has been seen every year since 2009 and simultaneously with this the P/E has reached over 50.
When we look at the debt of Enbridge, we have already mentioned the high interest expenses, however an even more extreme metric is seen when the number of years to pay off all long-term debt using net earnings is calculated (Buffett prefers a company be able to pay off all LT debt within 3 years this way). Currently, it would take ENB over 28 years to pay off all LT debt using net earnings, up significantly from the still-obscene 23, and 15 years seen in 2011, and 2010 respectively. Despite this, the debt to shareholder equity ratio was 0.67 at the end of 2012, a slight decrease from the previous year of 0.70 and significantly higher than the 0.52 and 0.44 seen at the end of 2009 and 2010 respectively. This is comparable to what Buffett likes, however the capital expenditures are exceedingly high. In 2012 the capital expenditures as a percent of net income reached almost 200%, double that of the previous year.
So what does this mean to Enbridge shareholders? I would certainly not recommend entering a position currently. Things may change once / if the Northern Gateway pipeline becomes operational, but currently any portfolio space being allocated to Enbridge would likely be better served by another pipeline. Of course, all investors must do their own due diligence before entering or exiting any position with their own investment goals in mind.