Using Ratios To Identify Stocks Set To Outperform Their Peers: Pipeline Rankings

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Includes: EPD, ET, KMI, MMP, NS
by: Stock Scrutiny
Summary

Introducing the pipeline industry to my research project.

Included are the stocks' rankings in debt, profitability, efficiency, and growth categories.

Weighting of each category is presented, as well as adjusting for buyback rates.

Introduction

My next article in this series looks to add the pipeline industry to my research. Any new readers that wish to see a detailed explanation on how I arrive at these results, please see my introductory article that elaborates on my process. As a quick summary, I believe that over the long run, stocks that rank higher than their competitors financially (according to my assortment of ratios) will outperform stocks that have a lower ranking in that same industry. Ratios have their shortcomings, but if utilized properly, they can be helpful in analyzing a company's current financial position.

Included in this analysis is Energy Transfer (ET), Magellan Midstream Partners (MMP), Enterprise Products (EPD), Kinder Morgan (KMI), and NuStar Energy (NS). Pricing data is gathered from Nasdaq, while scores were calculated using financial statements from E-Trade.

Ratio Research

Debt

Company Name Total Debt/ Total Equity Quick Ratio Current Ratio Defense Interval Current Liquidity Ratio EBIT/ Interest Expense
Energy Transfer 223.8% 0.53 0.73 4.1 423.1 2.49
Magellan Midstream Prtnrs 161.6% 0.68 0.96 61.4 108.1 4.8
Enterprise Prods Partners 109.7% 0.63 0.85 6.5 390.2 4.13
Kinder Morgan P 110.8% 0.71 0.76 141.5 274.2 2.14
NuStar Energy 110.9% 0.55 0.63 3.3 207.8 1.89

Current Debt Scores

1. Magellan Midstream- 1.83

2. Kinder Morgan- 2.33

3. Enterprise- 2.5

4. NuStar Energy- 4

5. Energy Transfer- 4.33

Profitability

EBIT Margin Gross Margin Net Margin Return on Assets Net Income per Employee Effective Tax Rate
Energy Transfer 10.8% 12.1% 3.6% 2.2% 166,213.5 0.1
Magellan Midstream Prtnrs 36.5% 43.3% 46.6% 17.6% 714,092.6 0.0
Enterprise Prods Partners 13.6% 13.9% 11.4% 7.5% 592,985.7 1.4
Kinder Morgan P 28.5% 35.1% 11.2% 2.0% 145,386.9 23.4
NuStar Energy 18.1% 23.5% 10.3% 3.1% 133,543.8 5.3

Current Profitability Scores

1. Magellan Midstream- 1

2. Enterprise- 2.83

3. Kinder Morgan- 3.5

4. NuStar Energy- 3.67

5. Energy Transfer- 4

Efficiency

Sales per Employee Return on Equity Capital Expenditure Ratio Employee Cost Per Unit of Revenue Total Asset Turnover Return on Invested Capital
Energy Transfer 4.6 20.2% 7.3 1.3 0.61 3.7%
Magellan Midstream Prtnrs 1.53 55.9% 5.2 6.8 0.38 20.1%
Enterprise Prods Partners 5.22 17.9% 8.7 0.3 0.66 8.9%
Kinder Morgan P 1.3 4.8% 4.9 4.2 0.18 2.3%
NuStar Energy 1.29 7.7% 4.3 5.4 0.30 3.5%

Current Efficiency Scores

1. Enterprise- 1.5

2. Energy Transfer- 2.17

3. Magellan Midstream- 2.67

4. Kinder Morgan- 4.33

4. NuStar Energy- 4.33

Growth

Free Cash Flow Growth Revenue Growth Total Debt Growth EPS Growth Change in Working Capital Growth
Energy Transfer 50.0 28.4 24.5 2.8 272.
Magellan Midstream Prtnrs 74.7 35.1 24.2 62.7 -40.1
Enterprise Prods Partners 1,037.5 37.7 15.4 51.4 153.
Kinder Morgan P 44.1 2.6 -13.7 576.2 175.
NuStar Energy -56.7 -5.9 -0.3 -69.0 7.8

Current Growth Scores

1. Enterprise- 2.2

2. Kinder Morgan- 2.4

3. Magellan Midstream- 3

4. Energy Transfer- 3.2

5. NuStar Energy- 4.2

Weighting

After implementing performance-based weighting to each category, I have determined that the debt ratios are most correlated to price performance, followed by growth, profitability, and efficiency. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:

(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score

... it now looks like this:

(Debt Score x .28) + (Profitability Score x .24) + (Efficiency Score x .22) + (Growth Score x .26) = Final Score

With this weighting, more value is given to categories with the greatest correlation to price performance, which, in turn, should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the pipeline industry:

1. Magellan Midstream- 2.12

2. Enterprise- 2.28

3. Kinder Morgan- 3.07

4. Energy Transfer- 3.48

5. NuStar- 4.05

Adjusting For Share Buybacks

In my most recent article, I introduced how share repurchases can influence share price, and thus, why my future analyses will attempt to account for companies' strategies in this area. For more details on how I determine these upcoming weights, please see the article that explains its implementation. In short, I standardize each company's rate of common shares outstanding reduction to have an effect of between -.1 and .1, with the stock that retires the greatest percentage of its shares to receive the .1 improvement in its score and so on. Here is a table showing the data:

Share Repurchase Rate Effect on Score
Energy Transfer -150.2 0.1
Magellan Midstream Prtnrs -0.2 -0.1
Enterprise Prods Partners -3.2 -0.096
Kinder Morgan P -1.4 -0.0984
NuStar Energy -36.4 -0.051733333

Complete Scores

1. Magellan Midstream- 2.02

2. Enterprise- 2.19

3. Kinder Morgan- 2.97

4. Energy Transfer- 3.58

5. NuStar Energy- 3.99

Magellan Midstream had a tremendous showing in this analysis, scoring a 2.02 overall. One of the few companies to do it, Magellan scored a perfect 1 in the profitability category- meaning each of its ratios is higher than the other four companies. Growth was mediocre for the firm, but its remaining 3 categories were enough to pull down its score into first place. Another solid boost was gained by having the best share repurchase rate, which in the case for this group of stocks, means they issued the smallest percentage.

Only a few points behind first place Magellan was Enterprise. Enterprise scored under a 3 in each of the four categories, with its most notable score coming from the Efficiency category. That score didn't contribute quite as much to its complete score as they probably would have liked due to the efficiency category being weighted the least-meaningful category. Regardless, Enterprise saw quality scores across the board and was near the better end in terms of repurchase rate as well. Moving almost a point down the spectrum was third place finisher Kinder Morgan. The silver bullet to this company's chances at the top spot was its lagging efficiency numbers, which tied for last place with an abysmal score of 4.33. With that being said, buyback rate was enough to bring the ending score into above average territory (under 3) to settle at 2.97.

The fourth place finisher was Energy Transfer. Excellent efficiency metrics were not enough for the stock's score, as it was largely weighed down by struggling debt and profitability ratios. The company also issued a large amount of stock in the last year, which caused its score to take another hit when adjustments were made. Rounding out the bottom of the list was NuStar Energy, who placed at a 4 or worse in three of the four tracked categories. Poor growth and efficiency levels relative to the rest of its peers highlighted NuStar's struggle, each resulting in last place in their respective groups. One would think a lot of their ratios would need to improve in upcoming years to compete with the rest of the pipelines in this analysis.

Conclusion

Ratios certainly aren't the be all and end all, but I'm a firm believer this type of strategy can serve as a useful supplement for investors conducting a holistic analysis. Since this is the first year I ranked pipelines, the scores are just a snapshot in time of their respective financial strengths and weaknesses. Where the real value will be drawn is when multiple years of scores can be analyzed for trends or patterns.

Feel free to leave any feedback or suggestions in the comment section, and if you wish to see future articles ranking different industries as well as statistical breakdowns of historical scores and their relation to price, click the orange follow button at the top of the page.

Also readers are welcome to suggest industries for me to add into my research. Any suggestions will be put into a written article within the next couple weeks!

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.