By Daniel Shvartsman
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We are taking one more look at Kinder Morgan (KMI). We started our Behind the Idea series on the stock with Mike Taylor and I coming to the company fresh - as newbies, you can say - and scratching our heads at readers' and authors' use of company talking points without critical analysis, especially in light of the company's dividend cut and sell-off in 2015. We then spoke with Kirk Spano, who admonished us for the backwards-looking approach we took and set the ground for KMI's future and why it looks good.
The question of KMI's reliance on DCF - distributable cash flow - and the way investors applied it to their analysis of the stock still lingered though. Fortunately, one of the people who reached out to us after our first podcast was Dividend Streamer, who had a lot to say on this topic. You can check out his article on Kinder Morgan's Real Cash Flows for more background on how he thinks about the company's cash flow situation. I spoke with him on Friday, May 10th, to better understand how he approaches the company and what he thinks makes KMI stand out.
I really enjoyed the discussion, and I think anyone interested in KMI or in critical thinking as you analyze stocks would benefit from listening to it. Dividend Streamer flipped the tables and asked me what I'd learned or what I took away from our three-part discussion. It's at the end of the podcast, so I won't re-summarize it all, but there are a couple things that stand out from this process that I want to highlight.
We call Behind the Idea the podcast that looks at what makes great investment analysis work. Our initial review of KMI suffered for being a little glib and imprecise - most especially when referring to KMI's oil exposure without making it clearer the company focuses on natural gas transport. But I think the points we made stand, and those points were "don't fall into this idea of no commodity exposure" and "be skeptical about company provided non-GAAP numbers". Or to tie that together, great investment analysis requires going beyond what management is saying, to further understand the company's position and their presentation of their numbers. We found a lack of that in preceding coverage on Kinder Morgan, and at least in the context of these three podcasts, I think it's been better addressed (if not done to death).
The other side of that is the importance in doing your own work, which is of course related to that. Kirk and Dividend Streamer have both done a nice job of putting the company's commodity exposure in context, for example. I'm still not sure I prefer Dividend Streamer's "DCF 2.0" as the way to analyze the firm, but the definition is clear and I understand how I could use that, and what the drawbacks and advantages are as compared to other approaches.
And maybe a last bonus thing - investing is fun, and following the market is fun. Weird and new things happen. It's a window into the broader economy and a way to understand the world. There are a lot of characters. And individual and mass psychology is on display every day. We try to keep that spirit in mind when we start digging into a topic, as well as in our follow-up discussions. Have fun, study a company, and maybe learn a little something along the way.
- 3:30 - KMI - toll road or landlord?
- 7:00 - KMI's secret sauce - it's in the fine print (and Richard Kinder's imprint on the company)
- 18:30 - Getting into the risks of the story, if it's not commodity pricing
- 23:15 - DCF 2.0, distributable cash flow but better...
- 28:30 - The difference between a trucking company's capital expenditures and a pipeline company's capital expenditures (cap-ex)
- 33:45 - How to apply DCF 2.0 to valuation, and the trade-off between shareholder returns and growth
- 44:15 - Factoring in debt
- 52:00 - The alternative - modeling future cash flows - and the challenges therewith
- 1:01:30 - Flipping the script - what are final takeaways from this series?
Two of the stories Dividend Streamer references on this podcast:
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: Daniel has no positions in any stocks mentioned. Dividend Streamer is long KMI and FDX.