Recently, companies in the energy infrastructure business, such as MLPs and Kinder Morgan (NYSE:KMI), saw their stock prices decimated due to the drop of the oil price. Their outlook is bleak because there is no oil price recovery on the visible horizon. However, they indeed represent better value today than a few months ago. Is now the time to be greedy or fearful? That is the million-dollar question that nobody knows the answer to.
Nevertheless, if you look at these companies as businesses, there is an intrinsic value of these businesses. Such an intrinsic value might not necessary be the desirable stock price, but they are a good reference point. If the stock price is much less than the intrinsic value, there is a potential for appreciation for a long-term investment.
The Benjamin Graham formula is a popular fundamental analysis method to determine the intrinsic value of a stock. Using the Graham formula, investors can quickly determine how rational the price of a stock is. His formula represents a valuation approach that focuses on the true value of the underlying company.
Graham intrinsic value is a product of three factors:
- There's the last 12 months' earnings per share. When EPS is higher, the intrinsic value of a stock is higher.
- A desirable P/E ratio of 8.5, plus twice the estimated earnings per share growth rate. When the potential growth rate of earnings per share for the next five years is higher, the intrinsic value is higher. This factor relies on the accuracy of the estimate, which can vary greatly. Therefore, it introduces great uncertainty to the intrinsic value.
- There's also the typical 20-year AAA corporate bond yield divided by the current 20 year AAA corporate bond yield.
Companies Under Review
We will examine the intrinsic value of some well-known companies in the energy infrastructure business. Some of them are MLPs, some of them are companies. The companies included in this article are Kinder Morgan, Enbridge Energy Partners LP (NYSE:EEP), Energy Transfer Equity LP (NYSE:ETE), Buckeye Partners LP (NYSE:BPL), ONEOK Partners LP (NYSE:OKS), Williams Partners LP (NYSE:WPZ), Magellan Midstream Partners (NYSE:MMP), Spectra Energy Corp. (NYSE:SE), Williams Companies (NYSE:WMB), Enbridge, Inc. (NYSE:ENB), and Enterprise Products Partners LP (NYSE:EPD). These companies represent the largest energy infrastructure companies in North America. Their fortune is tied together by the price of oil.
Methodology and Results
I took financial data from Finviz.com and inserted it into the Graham Intrinsic Value formula. The 20-year AAA corporate bond yield data can be found here. The current yield is 3.73%. The results are listed below:
Source: EPS and growth rate data from Finviz.com.
We can see that the price/intrinsic value ratio varies a lot. The only stock that has negative intrinsic value is ENB, because it lost $0.27 per share in the 12 trailing months. The stocks that forecast negative growth in the next five years, OKS and WMB, have extremely low intrinsic values. On the other hand, the stocks with a high future growth rate, EEP and ETE, have high intrinsic values.
The best value stocks are represented by low price/intrinsic value ratio: EEP at 47%, ETE at 10%, MMP at 56%. In other words, their stock price has the largest discount to the intrinsic value.
The intrinsic value itself does not represent the whole picture of a company's value. Since the earnings growth rate of the next five years has a large impact on the intrinsic value, the accuracy of such a forecast can cause a large variation in the intrinsic value. Nor does the formula take into consideration the debt and dividend situation. However, to screen using Graham intrinsic value, one can rule out the stocks that have lower fundamental performance. More research is required to evaluate these companies with favorable intrinsic values.
Disclosure: I am/we are long KMI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.