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Kinder Morgan Energy Partners L.P. (NYSE:KMP) is a great company to own over the long haul. It is the largest independent operator of petroleum-based product pipelines in the United States. It owns and operates over 28,000 miles of pipeline and roughly 180 terminals. It is also the largest carbon dioxide transporter in the country. The company has an excellent history of increasing its distributions. It has consecutively increased its distributions for 15 years. Management recently raised the distribution rate by 7% year over year. We are going to take a look at this company both from a fundamental and technical aspect. Before we examine a company, we put it through a selection process that is described below to make sure it fulfils certain basic requirements.

The selection process:

  1. Consecutively increased the dividend for 10 years or more
  2. Cash flow per share should be trending upwards for the past 3 years
  3. A quarterly earnings growth rate of 35% or higher
  4. Annual EPS before NRI should be trending upwards for the past 3 years
  5. An interest coverage ratio of 4.00 or higher
  6. A five year dividend growth rate of 6.00% or higher

Points of interest

  1. The company's portfolio is going to expand with the addition of a portion of El Paso Natural Gas. These assets are now in the control of Kinder Morgan Inc (NYSE:KMI) and are expected to be assigned to the partnership by the end of the 3rd quarter.
  2. The quarterly cash distribution was increased in the 2nd quarter to $1.23 per common. Management expects to declare a cash distribution of $4.98 per unit for 2012. This would represent an increase of 8% over the 2011 payment of $4.61 per unit.
  3. 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.
  4. Consecutive dividend increases for 15 years.
  5. A very strong quarterly earnings growth rate of 76%.
  6. Analysts have projected growth rate of 21.5% per annum for the next five years.
  7. A healthy five-year dividend growth rate of 6.7%.
  8. A good interest coverage of 4.00.

Charts and tables of value

A stock tends to perform better when it is trading above the EPS consensus estimate line. In this case, the stock is trading well above the EPS consensus line and so the long-term outlook is still bullish. It would have to trade below $75 to drop below the EPS consensus line.

$100K invested 10 years ago would have grown to $240K as indicated in the chart below. We simply multiplied the result by 100 to arrive at our answer. The table below uses a starting value of 1K.

The competition

Kinder Morgan Energy Partners will be compared with two competitors using several key metrics such as P/E, quarterly revenue growth, operating margins, PEG, etc. This will give you further insight into the company. It could also help you determine if Kinder Morgan is the right play for you.

KMP

(NYSE:EPD)

(NYSE:WMB)

Industry

Quarterly Revenue Growth

0.06

-0.13

-0.07

0.21

Revenue

8.38B

43.96B

7.94B

2.16B

Gross Margin

0.48

0.07

0.30

0.25

EBITDA

3.38B

4.16B

3.0B

405.80M

Operating Margin

0.28

0.07

0.23

0.19

Net Income

682.80M

2.41B

747M

N/A

EPS

-0.42

2.75

0.63

0.97

P/E

N/A

19.70

55.3

22.10

PEG (5 yr expected):

1.80

2.87

1.87

4.69

P/S

3.64

1.08

2.73

1.68

M= Million B= Billion

The Technical Picture

The stock is currently trading in the overbought ranges and is having a hard time trading above 86.00. So far, each attempt to trade above 86.00 has failed. Note that the stock also tends to pull back when it has tested the +2 standard deviation Bollinger bands (illustrated by the blue boxes in the above chart) as is the case right now. The overall market is also still in a corrective phase and given the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) inability to trade above 147, there is a good chance that the 138.00 ranges could be tested. This would translate into S&P 500 trading down to the 1380 ranges. Given these conditions we would wait for the stock to pull back before committing new money to this play.

The stock has a fair amount of support in the $83.00 ranges, but the support is much stronger at $81.50. $81.50 also corresponds to the 200 moving day average {(NYSE:MA)}. It is usually a good sign if a stock can test its 200 MA or trade below it, but close above this level by the end of the week. Consider waiting for a test of the $81.50-$82.00 ranges before jumping into this play.

A weekly close below $80 will most likely result in a test of the $75.00-$76.00 ranges. Hence, it would make sense to divide your money into two portions and deploy one at $81.50 or better and the second one if the stock trades down to the $75.00-$76.00 ranges

You could also sell puts at strikes you would not mind owning the stock. For example, you could sell the March 2013, 82.50 puts if the stock trades down to the suggested ranges. These puts are currently trading in the $3.20-$3.25 ranges. If the stock drops down to the stated ranges, these puts should trade in the $4.20-$4.30 ranges. If the shares are assigned to your account, you will get in at a much better price than someone who decided to purchase the shares outright at $81.50 or better. When the premium is factored in, your final cost per share will work out to be roughly $78.30. The disadvantage with this strategy is that there is no guarantee that the shares will be put to your account. If the shares are not put to your account, you at least get paid for your efforts via the premium, which in this case works out to be roughly 5.5% in 5 months.

Fundamental data

The data below should easily enable you to decide if this stock meets with your investment objectives. Some of the key areas to pay attention to are sales, net income, Interest coverage ratio, current ratios, profit margins, cash flow and 3-5 year projected EPS growth rates. For those who are not familiar with the interest coverage ratio and current ratio, we have provided a brief explanation of both below.

The Interest coverage ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

The Current Ratio allows you to see if the company can pay its current debts without potentially

Company: Kinder Morgan Energy

Key ratios

  1. Consecutive dividend increases = 15 years
  2. Three year dividend growth rate = 4.45%
  3. Profit Margin = 14.32%
  4. Quarterly Revenue Growth = 6.4%
  5. Quarterly Earnings Growth = 76%
  6. Sales versus 1 year ago = 1.7%
  7. 5 year net profit margin = 13%
  8. Total return last three years = 75%

Growth

  1. Net Income ($mil) 12/2011 = 1258
  2. Net Income ($mil) 12/2010 = 1316
  3. Net Income ($mil) 12/2009 = 1268
  4. Net Income Reported Quarterly ($mil) = 153
  5. EBITDA ($mil) 12/2011 = 2809
  6. EBITDA ($mil) 12/2010 = 2780
  7. EBITDA ($mil) 12/2009 = 2628
  8. Cash Flow ($/share) 12/2011 = 11.72
  9. Cash Flow ($/share) 12/2010 = 10.34
  10. Cash Flow ($/share) 12/2009 = 10.54
  11. Sales ($mil) 12/2011 = 8211
  12. Sales ($mil) 12/2010 = 8078
  13. Sales ($mil) 12/2009 = 7003
  14. Annual EPS before NRI 12/2009 = 1.31
  15. Annual EPS before NRI 12/2010 = 1.47
  16. Annual EPS before NRI 12/2011 = 1.75

Dividend history

  1. Dividend Yield = 5.9
  2. Dividend Yield 5 Year Average = 6.8
  3. Dividend 5 year Growth = 6.7

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 5
  2. 5 Year History EPS Growth = -2.46
  3. ROE 5 Year Average = 22.35
  4. Current Ratio = 1.50
  5. Current Ratio 5 Year Average = 0.50
  6. Quick Ratio = 0.47
  7. Interest Coverage = 4.00

Conclusion

This is a good long term play, but it's currently trading in the overbought ranges. Consider waiting for the stock to pull back to the stated ranges before taking a position. One alternative strategy would be to sell puts at strikes you would not mind owning the stock. The benefit of this strategy is that it reduces your overall cost as you get to apply the premium towards your purchase. Secondly, if the shares are not assigned to your account, you get paid for your efforts via the premium. The disadvantage is that there is no guarantee that the stock will be put to your account.

EPS charts and a major portion of the historical data used in this article were obtained from zacks.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Kinder Morgan Energy Partners A Long Term Buy, But Wait For A Pullback