Are Kinder Morgan Shares a Value Play?

Energy

Published: July 8, 2016 12:20 pm

Last Updated: January 13, 2020 5:56 am

When Kinder Morgan Inc. (NYSE: KMI) slashed its annual dividend by 75% late last year, the sky fell on the stock price. The stock dropped nearly 70% by mid-January.

Shares came back beginning in February and the year-to-date performance of Kinder Morgan stock shows a gain of nearly 25%. Warren Buffett, or one of his fund managers at Berkshire Hathaway Inc. (NYSE: BRK-A), must have seen that coming because Berkshire acquired 26.5 million shares in December of last year at a price somewhere below $15 a share.

When we covered Berkshire’s acquisition of Kinder Morgan stock rather than that of, say, Enterprise Products Partners LP (NYSE: EPD), our take was that added the complexity of a master limited partnership (MLP) to Berkshire’s already complex structure may have figured into Berkshire’s decision.

Berkshire’s purchase price for its stake in Kinder Morgan was less than $400 million, barely 1% of Berkshire’s market cap, so it was not a huge risk.

It may be even a smaller risk now. Kinder Morgan stock’s forward price-to-earnings (P/E) ratio is a heady 23.76, compared with Enterprise’s more modest 19.56 P/E ratio. And while it’s true the Kinder Morgan’s first-quarter earnings per share (EPS) of three cents are far behind Enterprise’s EPS of $1.26, Kinder Morgan’s operating margin for the trailing 12 months is nearly 29% compared about 13% for Enterprise.

Kinder Morgan is also a cash machine. It’s operating cash flow in the past year is $5.1 billion, more than 20% greater than Enterprise’s. Kinder Morgan also trades closer to its first-quarter book value per share ($15.78) than does Enterprise ($10.28).

At Thursday’s closing price of $18.40 and a consensus price target of $20.79, Kinder Morgan’s implied gain is 13%.

Enterprise’s common units closed at $28.92 and the consensus price target on the stock is $32.58, for an implied gain of — wait for it — 12.66%.

For investors the big difference between the two huge energy infrastructure providers is their payouts to investors. Enterprise just raised its quarterly distribution to $0.40 per common unit for a dividend yield of around 5.5%. Kinder Morgan pays a quarterly dividend of $0.125 per share for a dividend yield of 2.73%.

If Kinder Morgan is a value play then it appears to be based on its price-to-book value ratio of 1.17. The same metric at Enterprise is 2.81.

One thing to keep in mind though is that Kinder Morgan is nearer the beginning of a turnaround than near the middle, and investors are going to have to adopt some of Buffett’s legendary patience.

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