Kinder Morgan Energy (KMP) is an oil and gas company in the United States operating a pipeline transportation system. Kinder Morgan transports gasoline, diesel fuel, jet fuel, and natural gas liquids in North America. The company is structured as an MLP, and works in the same field as competitors Enbridge Energy (EEP) and Plains All American Pipeline (PAA). KMP has a market capitalization of $29 billion.
Reasons Why Kinder Morgan Is Overvalued
The main reason for my bearish stance is a mismatch between KMP's operating performance and dividend distributions, which I consider unsustainable in the long-run. Kinder Morgan just announced disappointing Q2 earnings:
- Revenues came in at $1.85 billion, which is about 5% lower compared to last year, and missed consensus estimates by $350 million
- Net earningsYOY are down a whopping 33%
- EPS came in at $0.37, missing consensus by a healthy 21%.
At the same time when revenues fall and do not meet expectations, the company increases its quarterly dividend to $0.35, up 16.6%. I think this is a wrong signal to send in terms of sustainability, especially considering a relatively high leverage ratio of 1.8x.
Given the volatility in EPS and EPS growth forecasts, high leverage ratios and high dividends, Kinder Morgan stock is highly risky. Analysts are expecting an earnings CAGR of 5% over the next five years. That is not enough to justify an extreme P/E ratio of 34. At 59, tThe P/CF ratio also indicates extreme overvaluation, with Kinder Morgan being overdue for a correction in the share price.
The bull thesis revolves around the idea of high dividends -- similar to mREITs such Annaly (NLY), American Capital Agency (AGNC) and Chimera (CIM) -- which are temporarily popular until the reality of lower earnings and dividends renders their thesis meaningless. Currently, Kinder pays a dividend of 5.61%, with investors neglecting the riskiness and volatility of the oil and gas business.
Investors are also faced with dilution risk, which results in investors receiving a proportionately lower share of earnings if they do not subscribe to new shares. Capital increases are often done to finance capex or bring leverage ratios down.
Analysts estimate an average 2013 EPS of $2.54. Kinder Morgan metrics deserve a multiple of 15 (maximum, in my opinion) which yields a fair value of $38.1. A current quote of $85.58 exhibits huge downside potential of 55%, which is why I rate Kinder Morgan a Sell.
Technically, the company trades strongly. The stock has broken through the upper bound of its downward sloping trend canal, and posts a steep increase from $75 to $85.58 in the last three weeks. I suggest that Kinder is currently overbought, and could test a re-entry into the trend canal. The company trades at close to its 52 week high of $90.60. Traders may want to wait and see if Kinder Morgan can surpass its 52 week high, which would result in immediate upside potential as momentum-driven traders are attracted to the stock. My near term perspective is for correcting stock prices. Correspondingly, I rate Kinder Morgan a Hold from a technical perspective.
Disclosure: I am short NLY, AGNC.
Source: http://seekingalpha.com/article/741181-kinder-morgan-energy-55-overvalued-strong-sell?source=feed
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