Magellan Midstream Partners LP: Wait For A Pullback

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 |  About: Magellan Midstream Partners, L.P. (MMP), Includes: BPL, ETP, NS, RGP
by: Tactical Investor

Basic overview

Magellan (NYSE:MMP) owns the longest refined petroleum products pipeline system in the country. We can tap into more than 40% of the nation's refining capacity and store over 75 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. With Magellan, you are investing in the strength and stability of an investment-grade company. Our investors benefit from our primarily fee-based business, low-risk growth projects and attractive quarterly cash distributions.

Reasons to be bullish on Magellan Midstream Partners LP

A good free cash flow of $313 million

A strong quarterly earnings and revenue growth rate of 25% and 22% respectively

An outstanding three-year total return of 156%

It has consecutively increased dividends for 10 years in a row.

Sales have been trending upwards for the past three years. From $1.01 billion in 2009, they have surged to $1.74 billion in 2011.

Operating cash flow has also generally been trending upwards for the past few years.

It has a weak quick ratio but a good current ratio and a decent interest coverage ratio of 3.24 which make up for this shortfall.

A very good five year dividend average of 6.4%

Interestingly it has a payout ratio of 86%, which is surprisingly low for an MLP which normally boast payout ratios well in excess of 100%. For the record, payout ratios are not that important when it comes to MLPs; look at our note further in the article for an explanation.

A decent five year dividend growth rate of 5.29%

EPS is projected to increase from an estimated $3.62 in 2011, to $3.80 in 2012 to $4.13 in 2013.

MMP owns a very attractive portfolio of energy infrastructure assets that help it generate recurring, and a stable fee based revenues. It owns the longest refined petroleum products pipeline system in the country, which gives it access to over 40% of the refining capacity of US refining capacity.

It also has 85 petroleum terminals with a capacity of over 70 million barrels.

After the acquisition of petroleum story and pipelines from subsidiary BP plc, MMP now owns one of the largest crude oil storages in the Cushing crude oil region, and management is continually looking for opportunities to improve the utilization rates of these assets.

MMP has a stellar record for consistently increasing distribution payments. Since its IPO in 2001, its distribution per unit is up by over 210%

100K invested in MMP for 10 years would have grown to 439K.

Key data investors should be aware of in regard to investing in MLPs and REITS

Payout ratios are not that important when it comes to MLPs/REITS as they are generally pay a majority of their cash flow as distributions; in the case of REITS by law they have to pay out 90% of their cash flow as dividends. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs and REITS is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution/dividend declared per unit/share.

MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.

Magellan Midstream Partners LP

Industry : Equipment & Services

Free cash flow= $313.2 million

Performance

Qtrly Earnings Growth = 25.1%

Qtrly Revenue Growth = 22.2%

Total return for the past 3 years = 156.75%

Total return for the past 5 years = 106.57%

Total return for the past 12 months = 25.5%

Consecutive dividend increases = 10 years

Growth

Net income for the past three years

Net Income - 2011 = $226 million

Net Income - 2010 = $312 million

Net Income - 2009 = $414 million

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $516

EBITDA ($mil) 12/2009 = $396

Sales ($mil) 12/2011 = $1749

Sales ($mil) 12/2010 = $1557

Sales ($mil) 12/2009 = $1014

Dividend Sustainability

Total cash flow from operating activities

2008 = $435.58 million

2009 = $269.44 million

2010 = $424.66 million

Payout Ratio 12/2011 = 86%

Payout Ratio 5 Yr Avg 12/2011 = 103%

Change in Payout Ratio = -18%

Other Key Important Ratios

Price to Sales = 4.69

Price to Book = 5.55

Price to Tangible Book = 5.84

Price to Cash Flow = 18.22

Price to Free Cash Flow = -114

Quick Ratio = 0.61

Current Ratio = 2.05

LT Debt to Equity = 1.46

Total Debt to Equity = 1.46

Interest Coverage = 3.24

Inventory Turnover = 2.66

Asset Turnover = 0.44

Dividend yield 5 year average = 6.4

Dividend rate = $ 3.17

Dividend growth rate 3 year avg = 4.59%

Dividend growth rate 5 year avg = 5.29

Consecutive dividend increases = 10 years

Paying dividends since = 2001

Total return last 3 years = 156.75%

Total return last 5 years = 106.57%

Related companies (Peer Group analysis)

NuStar Energy L.P. (NYSE:NS)

Industry : Refining & Marketing

It has a free cash flow rate of $N/A and a current ratio of 1.22 and an interest coverage ratio of 4.47

Net income for the past three years

Net Income - 2011 = $225 million

Net Income - 2010 = $239 million

Net Income - 2009 = $222 million

Total cash flow from operating activities

2008 = $485.19 million

2009 = $180.59 million

2010 = $362.5 million

Dividend yield 5 year average = 7.36

Dividend rate = $ 4.36

Dividend growth rate 3 year avg = 2.2%

Dividend growth rate 5 year avg = 3.59

Consecutive dividend increases = 10 years

Paying dividends since = 2001

Total return last 3 years = 59.14%

Total return last 5 years = 29.12%

Regency Energy Partners LP (NYSE:RGP)

Industry : Equipment & Services

It has a free cash flow rate of $-270.30M and a current ratio of 0.79 and an interest coverage ratio of 1.33

Net income for the past three years

Net Income - 2011 = $140 million

Net Income - 2010 = $-11 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2009 = $143.96 million

2010 = $169.21 million

2011 = $253.76 million

Dividend yield 5 year average = 8.23

Dividend rate = $ 1.81

Dividend growth rate 3 year avg = 1.04%

Dividend growth rate 5 year avg = 3.86

Consecutive dividend increases = 1 years

Paying dividends since = 2006

Total return last 3 years = 211.3%

Total return last 5 years = 28.18%

Buckeye Partners, L.P. (NYSE:BPL)

Industry : Equipment & Services

It has a free cash flow rate of $N/A and a current ratio of 1.15 and an interest coverage ratio of N/A

Net income for the past three years

Net Income - 2011 = $50 million

Net Income - 2010 = $43 million

Net Income - 2009 = $109 million

Total cash flow from operating activities

2008 = $215.26 million

2009 = $47.67 million

2010 = $292.48 million

Dividend yield 5 year average = 7

Dividend rate = $ 4.08

Dividend growth rate 3 year avg = 5.45%

Dividend growth rate 5 year avg = 5.69

Consecutive dividend increases = 16 years

Paying dividends since = 1990

Total return last 3 years = 80.75%

Total return last 5 years = 58.99%

Energy Transfer Partners L P (NYSE:ETP)

Industry : Equipment & Services

It has a free cash flow rate of $-199.93M and a current ratio of 0.84 and an interest coverage ratio of 1.65

Net income for the past three years

Net Income - 2011 = $792 million

Net Income - 2010 = $617 million

Net Income - 2009 = $669 million

Total cash flow from operating activities

2008 = $1.26 billion

2009 = $826.88 million

2010 = $1.21 billion

Dividend yield 5 year average = 7.55

Dividend rate = $ 3.58

Dividend growth rate 3 year avg = 0.23%

Dividend growth rate 5 year avg = 2.46

Consecutive dividend increases = 0 years

Paying dividends since = 1996

Total return last 3 years = 60.77%

Total return last 5 years = 18.4%

Conclusion

As the markets are extremely overbought our advice to long-term investors would be to wait for a strong pull back before jumping into the market.

EPS, Price consensus, EPS surprise and broker recommendation charts obtained from zacks.com. Dividend history charts sourced from dividata.com. Free cash flow and revenue growth charts sourced from Ycharts.com. Earning Vs expectation charts sourced from smatmoney.com. Dividend history charts sourced from dividata.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.