- KMI is undervalued with some risks attached.
- The 7% yield can ease your worries.
- I give KMI a fair value of $19.47 in today's economic climate.
Kinder Morgan, Inc. (NYSE:KMI) is currently undervalued which was caused by a combination of the pandemic and the oil plunge. I believe the stock has lots of potential, given it can continue its projects and commodity pricing returns to pre-pandemic levels in the coming months.
Source: Kinder Morgan Home Page
Kinder Morgan is one of the largest energy companies in North America and a leader in each of its businesses: natural gas pipelines, product pipelines, carbon dioxide, and terminals. It owns or operates a total of about 84,000 miles of pipelines and 147 terminals. Within its businesses that make up the company, they are the:
- Largest natural gas network with approximately 70,000 miles of natural gas pipelines. We are connected to every important U.S. natural gas resource play, including the Eagle Ford, Marcellus, Utica, Uinta, Haynesville, Fayetteville and Barnett. We move about 40 percent of the natural gas consumed in America.
- Largest independent transporter of petroleum products, transporting about 2.1 million barrels of product per day. We move gasoline, jet fuel, diesel, crude, natural gas liquids and more.
- Largest transporter of carbon dioxide (CO2), transporting about 1.3 billion cubic feet per day. Most of the CO2 is used in enhanced oil recovery projects in the Permian Basin of West Texas.
- Largest independent terminal operator. Our liquids terminals store refined petroleum products, chemicals, ethanol and more, and have a capacity of 147 million barrels. Our dry bulk terminals store and handle such materials as coal, petroleum coke and steel, and we handle over 53 million tons per year. We also have a strong Jones Act shipping position with sixteen vessels in service.
Source: Corporate Profile
As far as its fundamentals go, it has seen better especially now with the pandemic and oil plunge that is happening. Both revenues and earnings have been hit and the company gave new guidance on its previously expected dividend increase of 25% to an annualized dividend of $1.25. The dividend was increased only 5% to an annualized dividend of $1.05 in order to preserve cash and maintain company flexibility during these trying times. The company is also committed to delivering on the previously promised $1.25 annualized dividend in the near future. The company also decreased expenses and reduced the planned 2020 CAPEX by 30% to help offset the decrease in DCF. With these changes, I think management made the right call in order to keep the company in a strong financial position during these times as well as increasing shareholder returns.
Price to Earnings (P/E): This method puts a value to a company relative to its historical P/E ratio. To do this, let's take a look at the current P/E and compare it to the five-year average P/E. At the time of writing this article, KMI is trading at $15.06 per share. This implies a current P/E of 26.24 using its expected forward earnings of $0.57. The five-year average P/E is 28.06. Based on its projected forward earnings, I calculated the value of the stock according to its historical P/E to be $15.99. This implies a 6% upside.
Price to Sales (P/S): This method puts a value on a company relative to its historical and forward P/S ratio. To do this, let's take a look at the current P/S and compare it to its five-year average P/S. At the current price of $15.06, the TTM P/S is 2.76 which implies sales of $5.46 per share. The five-year average P/S is 3.14. Based on this, I calculated the stock to be worth $17.14. This implies 14% upside.
KMI's forward P/S is 2.87. This implies sales of $5.25 per share. The five-year average forward P/S is 3.24. Based on this, I calculated the stock to be worth $17.01. This implies 13% upside.
I decided to include the P/S valuation method for KMI since the company has been hit hard by both the pandemic and the oil plunge. Because of this, I think I'll be able to get a more accurate valuation for the stock. I do not normally include P/S; however, I thought it would help draw a better picture of the stock.
Dividend Yield (DY): This method uses its current dividend yield and compares it to its historical average dividend yield. Then, with its current annual dividend payment, determines what the value would be if the stock reverted to its five-year average dividend yield. At the current price of $15.06, the stock has a dividend yield of 6.97%. The stock has a five-year average dividend yield of 4.49%. If the company were to return to its five-year average yield on its current annual dividend payment of $1.05 per share, the stock would be worth $23.39. This implies a 55% upside.
Discounted Cash Flow Model (DCF): This model takes into account the stock's future dividend payments and cash flows into its valuation. Using its historical FCF growth and a discount rate of 12%, I calculated the stock to be worth $11.72. This implies (22%) downside.
Enterprise Value (EV): This method takes into account a company's short-term and long-term debt, market cap, and any cash on hand and assets. According to this, the stock is worth $31.54. This implies 109% upside.
|Valuation Method||Stock Value|
Source: Seeking Alpha
Averaging out all the valuation methods, I calculated KMI to be worth $19.47 which gives investors a potential 29% upside in the stock.
Risks Associated With KMI
An investment in KMI comes with many headaches. Some of which include: commodity pricing and environmental issues that come with pipelines.
As for commodity pricing, this is showing in today's economy. Oil and gas prices have fallen incredibly since demand has been getting dragged down while supply stays atop. This was a major reason for the company's 9% revenue decline year over year. Gas volume also fell. Both of these played their part in the company's distributable cash flow falling 8% year over year. This is worrisome for any investor, especially an income-oriented investor like myself. As you can see, the company is not completely worry-free when it comes to commodity pricing. This has been proven in today's economic climate.
As for the environmental issues, KMI has run into a lot of conservation resistance. It doesn't help when the company makes a mistake and feeds into the conservationists. For instance, just recently KMI had to "pause" its "Permian Highway Pipeline in Texas after an accident last month contaminated drinking water near the project". Because of this, locals and conservation groups are threatening to sue KMI under federal pollution laws. This, I'm sure you can guess, is going to cost the company money. Money the company cannot afford to lose given the current market conditions. This is not the first run in with conservation groups KMI has had either. The company has had lots of opposition for its Permian Highway Pipeline. This should be concerning for investors since this pipeline is expected to bring in a combined 4.0 Bcf/D with the help of TX Intrastates and NGPL which will help propel its earnings once operational.
Each valuation method I used will not be entirely accurate due to the fact that some numbers have been skewed by the pandemic. In my stock valuations, I tried to account for this by excluding some valuations and including others. However, with the current dividend yield sitting at 7%, investors will be getting paid a nice dividend along with reaping the benefits of its undervaluation.
Be careful when choosing investments to add to your portfolio during the current market climate since valuations are skewed and fundamentals have been shaken. Do your own research before making any decisions with your money.
I hope you enjoyed the brief analysis of KMI, and if you want to read more analysis articles, then give me a follow and let me know in the comments what stocks you would like me to analyze.
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Analyst’s Disclosure: I am/we are long KMI. 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.
I am not a financial advisor and do not claim to be one. I am only providing my own insights into a stock and should be taken with caution. Do your own research before making any decisions.
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