EPD Stock Study (8-20-24)

Posted by Mark on October 11, 2024 at 06:40 | Last modified: August 20, 2024 12:12

I recently did a stock study on Enterprise Product Partners L.P. (EPD) with a closing price of $29.44.

M* writes:

     > Enterprise Products Partners is a master limited partnership
     > that transports and processes natural gas, natural gas liquids,
     > crude oil, refined products, and petrochemicals. It is one of
     > the largest midstream companies, with operations servicing
     > most producing regions in the Lower 48 states. Enterprise is
     > particularly dominant in the NGL market and is one of the
     > few MLPs that provide midstream services across the full
     > hydrocarbon value chain.

Master Limited Partnerships are not recommended for investment clubs. Slide 23 of Doug Gerlach’s presentation explains why.

I don’t think this should necessarily preclude individual investors from buying units (shares) as long as we stay mindful of tax implications and additional tax preparation costs depending on whether we hold in taxable or retirement accounts. I encourage doing your own research (i.e. search “should MLPs be held in an IRA”) and/or consulting a tax specialist.

Over the past 10 years, this large-size company has grown sales and earnings at annualized rates of 5.1% and 8.4%, respectively. Lines are somewhat up, straight, and parallel except for YOY sales declines in ’19 and ’23 and sales+EPS declines in ’15, ’16, and ’20. Ten- (Five-) year EPS R^2 is 0.77 (0.56), and Value Line gives an Earnings Predictability score of 80.

Over the past decade, PTPM leads peer and industry averages while increasing from 6.0% (’14) to 11.5% (’23) with a last-5-year mean of 12.3%. ROE also leads peer and industry averages by ranging from 11.7% in ’16 to 20.6% in ’22 with a last-5-year mean of 18.5%.

Remaining at 100.0% throughout, Debt-to-Capital is greater than peer and industry averages (~93% with minimum ~91% in ’17-’18). I wonder if this takes on a different M* meaning for MLPs, which pay out majority of cash flows as distributions to unit holders [and therefore depend nearly as much on loans/debt to finance operations as they do equity]. CFRA provides a table with eight peers for whom “LTD-to-Cap” ranges from 45.3% to 63.9%. EPD is second-lowest at 47.4%.

Quick Ratio is 0.6 and Interest Coverage is 5.5 per M* who also rates the company “Exemplary” for Capital Allocation and assigns a “Wide” Economic Moat.

Value Line gives a B++ grade for Financial Strength and writes:

     > Enterprise is one of the few dividend aristocrats in the MLP
     > sector… Finances are solid. Many MLPs are finally recovering
     > from the damage sustained during the pandemic. So, there
     > aren’t many members here with even average balance
     > sheets. Enterprise has managed to fund a large construction
     > program while keeping its debt levels under control.

With regard to sales growth:

• YF projects YOY 13.7% and 3.8% for ’24 and ’25, respectively (based on 9 analysts).
• Zacks projects YOY 13.4% and 6.0% for ’24 and ’25, respectively (2 analysts).
• Value Line projects 8.3% annualized growth from ’23-’28.
• CFRA projects 15.9% YOY and 10.5% per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 15.0% growth per year.

My 4.0% per year forecast is near bottom of the range.

With regard to EPS growth:

• MarketWatch projects 6.4% and 6.1% per year for ’23-’25 and ’23-’26, respectively (based on 22 analysts).
• Nasdaq.com projects 4.8% YOY and 2.4% per year for ’25 and ’24-’26 ( 5 / 5 / 3 analysts for ’24 / ’25 / ’26 ).
• Seeking Alpha projects 4-year annualized growth of 6.1%.
• Argus projects 5-year annualized growth of 8.0%.
• YF projects YOY 7.5% and 5.9% for ’24 and ’25, respectively (17), along with 5-year annualized growth of 6.2%.
• Zacks projects YOY 7.5% and 4.8% for ’24 and ’25, respectively (5), along with 5-year annualized growth of 7.2%.
• Value Line projects 5.9% annualized growth from ’23-’28.
• CFRA projects 7.1% YOY and 8.3% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 24.0%.
• M* projects long-term annualized growth of 3.1%.

I don’t typically include CFRA’s 3-year CAGR as a long-term estimate because sometimes it makes no sense. EPD EPS from ’20 through ’25 [with the last two being estimated] are $2.11/share, $2.21, $2.52, $2.53, $2.71, and $2.97: nowhere is a 24.0% 3-year CAGR even close (6.2%, 7.0%, and 5.6%, respectively).

My 4.0% per year forecast is near bottom of the long-term-estimate range (mean of six: 6.1%). Initial value is ’23 EPS of $2.52/share rather than 2024 Q2 EPS of $2.62 (annualized).

My Forecast High P/E is 12.0. Over the past decade, high P/E falls from 18.1 (’14) to 11.1 (’23) with a last-5-year mean of 13.3 and a last-5-year-mean average P/E of 11.2. I am near bottom of the range [only ’22 (11.5) and ’23 (11.1) are less].

My Forecast Low P/E is 8.5. Over the past decade, low P/E falls from 20.9 (’14) to 9.5 (’23) with a last-5-year mean of 9.0. I am forecasting toward bottom of the range [only ’20 (6.0) is less].

My Low Stock Price Forecast (LSPF) of $22.30 is default based on initial value from above. This is 24.3% less than the previous closing price and 12.9% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 75.2% in ’22 to 133% in ’16 with a last-5-year mean of 85.5%. I am forecasting below the range at 75.0%.

These inputs land EPD in the HOLD zone with a U/D ratio of 1.1. Total Annualized Return (TAR) is 11.0%.

PAR (using Forecast Average—not High—P/E) of 8.8% is less than I seek from a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 24 studies (my study and 18 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 7.5%, 5.9%, 12.8, 9.0, and 85.5%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 16.0 is higher than MS (10.9) and higher than mine (10.3).

MS high / low EPS are $3.39 / $2.55 versus my $3.07 / $2.55 (per share). My high EPS is less due to a lower growth rate. Value Line is in the middle at $3.55.

MS LSPF of $22.80 implies Forecast Low P/E of 8.9: roughly equal to the 9.0 mentioned above. MS LSPF is 2.2% greater than mine thereby resulting in slightly more aggressive zoning.

With regard to valuation, PEG is 1.5 and 2.7 per Zacks and my projected P/E, respectively: somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 1.0.

MOS is robust because my inputs are near or below respective analyst/historical ranges. MS sample is too small for meaningful comparison, but anecdotally its 15.2% TAR is 4.2%/year greater than mine.

Per U/D, EPD is a BUY under $25.90.

Until today, I would go on to say BI TAR criterion is met at $18.50/share given a forecast high price ~ $37.

This is incorrect because it excludes the [sizeable] dividend. Going forward, I will proceed by subtracting average yield (given my conservative PR) at Forecast High P/E (lower than yield at average P/E) from 15.0% (actually 14.87% with this number being inversely proportional to BUY threshold) and discounting forecast high price by resultant percentage for five years.

In this case, BI TAR criterion is actually met closer to $23.30 not $18.50: 6.3% average yield at Forecast High P/E subtracted from 15.0% equals 8.7% and $36.80 * (1 – (8.7 / 100) ) ^ 5 = $23.35.

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