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Larry is a long-time do-it-yourself investor, who has been buying stock for about 20 years. The main focus of his investing is in value plays. He has been featured by the Associated Press and in Canadian Business as a small investor to watch. Visit Larry's blog on Covestor... More
  • Pipelines.....Safety and Growth 0 comments
    May 22, 2009 05:47 PM | about stocks: TRP, ENB

    Is it possible to have your cake, and really eat it too? Can you really find a stock that offers very “visible” earnings, yet with some decent upside? I think so, and here are two of them…..

    Enbridge (ENB) and TransCanada (TRP) are often interchanged with each other, but they are relatively different in terms of how they generate their respective overall earnings. However, both of them offer an investor with a good chance for Capital appreciation, a decent (and growing) dividend and good downside protection in the event of another downturn in the market.
     
    Enbridge (ENB)
    Enbridge is often considered to be the more “growth” play between the two companies, and therefore usually carries a slightly higher P/E Multiple than TransCanada. The main business that most people know Enbridge for is its “Liquid... Pipelines (namely Crude Oil). Their existing pipelines mainly bring down Crude from the Western Canadian Sedimentary Basin to the Central/Eastern USA, and into Eastern Canada. These pipelines produce steady cash flow and very safe earnings. To bolster the existing network, they are adding several additional lines, including the Alberta Clipper, a massive 1000 mile pipeline to bring down extra Crude from the Alberta Oil Sands. This part of the business has produced incredible steady earnings growth of about 10% annually since 1995.
     
    In addition, Enbridge also gets considerable earnings from Nat Gas Pipelines, through their Investments Arm (Enbridge Income Fund) and through an extensive Natural Gas Distribution business in Eastern Canada, with almost 2 Million customers.
     
    Enbridge has rarely ever been considered a cheap stock, so you’ll have to pay up for it. It trades at about 15x expected 2010 Earnings, and rarely falls down below 14x Forward earnings. However, this is down from its traditional multiple of about 20x, and offers a decent long-term entry point. With a 4% dividend, good growth prospects (analysts forecast about a 10% Annual growth rate for the next 5 years) and a strong defensive nature, it is a good long term hold. Expect it to return to its traditional multiples when Credit markets ease up, with a 12 month target price of close to $45 to $48 CDN.
     
    TransCanada (TRP)
     
    TransCanada has a strong interest in the Pipeline world, but also has some interests in the Power Generation space. TransCanada owns and operates over 35000 miles of Pipelines throughout Canada, the US and Mexico. Primarily, they move Natural Gas from Western Canada to the Great Lakes area and Eastern Canada. Recently, they have begun to move Oil through much of the US, including an extension down to the Houston / Louisiana areas.
     
    At a recent Annual meeting, their CEO provided further insight into two massive upcoming projects (Alaska and Mackenzie). While they are both a long way away from completion, they both provide strong earnings growth visibility for many years. Finally, their Keystone project (which is an Oil Pipeline expansion from Alberta to Houston) is expected to be fully operational in the next 3 years.
     
    In terms of Power Generation, TransCanada has a strong mix of Power Generation stations in Alberta, Ontario and the NE USA. Their recent purchase of Ravenswood (which generates about 25% of the Power in the New York City area), has helped to bolster this area.  Finally, TransCanada is now the 2nd largest provider of Natural Gas Storage inNorth America, with a storage capability of over 350 BCF.
     
    Like Enbridge, it is rare to find TransCanada selling at a true “Fire sale” prices. The stock has traditionally traded in and around the 18x Forward earnings range in the past. It can be picked up today for about 13x its forecasted 2010 earnings, which makes this one priced at an attractive entry point. 
     
    A concern to be watched with TRP is that some analysts were concerned about its ability to raise capital for some of their many projects. This concern seems to have been eased somewhat, by the fact that they have a strong balance sheet and they were able to raise over $5B late in 2008 (which does help to show the confidence that many in the market have in this stock). With a dividend just shy of 5%, and solid (but steady) growth in the future, it isn’t unreasonable that TRP could break through its 52 week high of $40.71 CDN in the next 12 months.
     
    Disclosure – Currently am Long on TRP (It is my 5th largest position at 5.4% of my portfolio). I do not currently own Enbridge, but am looking to pick it up around the $35 CDN range.
    Stocks: TRP, ENB
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