Kinder Morgan - Pipe Dream Valuations

Aug. 9.12 | About: Kinder Morgan (KMP)

I can sympathize with investors who get suckered into buying glamor stocks at fancy prices. Many of these stocks are issued by companies that are the inspiring heroes of growth stories. However, investors sometimes price boring companies at lofty valuations, too. In a prior article, we showed how natural gas-focused independent oil and gas company Range Resources (NYSE:RRC) was trading at multiples wildly above its peers. In this article, we will see how Kinder Morgan Energy Partners (NYSE:KMP) is priced much higher than other oil and gas pipeline stocks.

There is no excuse for these valuations: Natural gas and pipeline stocks are boring! As is the case for Range Resources, the high price multiples of Kinder Morgan stock should dissuade investors from buying until its valuations descend closer to those of its competitors.

Computing Future Valuations From Growth Projections

Investors should buy stocks trading at prices that make them good deals. A poor company trading at a dismal price may be an excellent trade. Kinder Morgan shares are trading at the other extreme: This is a company trading at incredibly enthusiastic valuations that should be avoided. Its metrics are provided below, with other oil and gas pipeline companies:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

KMP

Kinder Morgan Energy Partners

80.4

9.9%

3.5

-1.9%

ENB

Enbridge

46.6

10.3%

1.5

12.8%

WMB

Williams Companies

25.4

12.9%

2.5

-3.1%

SE

Spectra Energy

18.1

6.4%

3.7

3.5%

PAA

Plains All American Pipeline

17.4

4.3%

0.4

8.8%

OKS

ONEOK Partners

15.4

7.6%

1.2

19.0%

Click to enlarge

Future valuation multiples of Kinder Morgan and its peer stocks were modeled by combining expected growth and trailing valuation multiples. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth are as follows:

Click to enlarge images.

PE Ratio Analysis KMPClick to enlarge

PS Ratio Analysis KMPClick to enlarge

The projected crossover dates span well into the distant future, which demonstrates how Kinder Morgan shares are overpriced. These projections illustrate the absurdity of current valuations for Kinder Morgan. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for Kinder Morgan shares that imply they can see generations ahead. The investing public does not have uncanny predictive abilities akin to the legend of Nostradamus.

Estimated convergence years are calculated below for Kinder Morgan:

KMP Peer Company

P/E Equivalence

P/S Equivalence

Enbridge Inc.

N/A

N/A

Williams Companies, Inc.

N/A

2038

Spectra Energy Corp.

2057

N/A

Plains All American Pipeline, L.P.

2040

N/A

ONEOK Partners, L.P.

2089

N/A

Click to enlarge

Investors should avoid Kinder Morgan at current prices. Instead, they should consider other companies on this list as more reasonable alternatives that can be justified without generations of sustained, phenomenal growth.

In particular, ONEOK Partners is trading at better valuations that are attractive when contrasted with its more expensive peers. ONEOK Partner's valuations start at much lower multiples than Kinder Morgan. Moreover, its growth trajectory maintains its dominance over Kinder Morgan for years beyond the reliability of analyst projections and most of our lifetimes.

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

Disclaimer: Please read the article disclaimer here.