- Kinder Morgan has not received much love from the broader market in recent months.
- This is a shame because the fundamental condition of the business is sound and shares look attractively priced.
- In all, this makes for a solid buy prospect heading into its upcoming earnings release.
After the market closes on July 20th, the management team at Kinder Morgan ( KMI ) is due to report financial performance covering the second quarter of the company's 2022 fiscal year. Although energy prices have been incredibly volatile this year, one attractive place for investors to consider in almost any pricing environment is the pipeline space. And with 83,000 miles of pipelines and 143 terminals in its portfolio , this particular firm is a behemoth in the market. In recent months, shares of the business have fallen. But for the most part, that decline has mirrored the broader market. The current expectation is for financial performance to continue to improve. But even if that does not come to pass, shares of the business look quite cheap on an absolute basis and they're trading more or less at the fair value range compared to similar firms. Overall, I see Kinder Morgan as a valid prospect for long-term, value-oriented investors. And as a result, I have decided to rate the business a 'buy' at this time.
What to expect
The last time I wrote an article about Kinder Morgan was May 3rd of this year. In that article, I used historical and cash flow projections to determine that the company offered some attractive upside moving forward. I pointed to improved financial performance over the prior months and lauded the company's track record for strong cash flows. At the end of the day, this all led me to rate the business a 'buy', indicating my belief that its shares would meaningfully outperform the broader market for the foreseeable future. So far, the market has proven stubborn. While the S&P 500 is down 9.2% since the publication of that piece, shares of Kinder Morgan have dropped by 11.2%.
No real fundamental data has come out between the time of that article's publication and today. What we do know, however, is that analysts currently have pretty high expectations for the business. For instance, the current forecast is for revenue to total $3.67 billion. That would represent an improvement of 16.5% over the $3.15 billion reported just one year earlier. Earnings per share should also come in at around $0.27. That would mark a significant improvement compared to the $0.34 per share loss the company experienced the same quarter one year earlier. To put this all in context, it might be helpful to consider how the company performed in the first quarter compared to expectations. Revenue of $4.29 billion beat analysts' expectations to the tune of $546.3 million. But earnings per share of $0.29 missed expectations by $0.01.
At the end of the day, however, I would make the argument that neither revenue nor net income is the greatest driver of the company, nor the determinant of its value. Instead, that should be cash flow. And when I say cash flow, I use that term loosely, referring to operating cash flow, distributable cash flow, EBITDA, and true free cash flow. Three of the four items here are well known, while the definition of true free cash flow is one that I made up. In short, this is defined as operating cash flow minus the capital expenditures needed to keep operations functioning as they have been in perpetuity. Theoretically speaking, this figure represents how much actual cash the company could throw off to its investors without changing its net leverage situation or growing.
In my aforementioned prior article on the company, I detailed how to calculate these figures. And since management's guidance has not changed since then, I see them as highly relevant today. At present, the operating cash flow figure, which has been adjusted to remove payments associated with non-controlling interests, should be $5.3 billion. That compares to the roughly $4.6 billion the company reported for 2021 if you remove the positive impact associated with winter storm Uri. The distributable cash flow with the company should be 4.7. That's up from the adjusted figure of 4.4 for 2021. The EBITDA of the company should be 7.2. That compares favorably to the 6.9 adjusted figure for the 2021 fiscal year. And the true free cash flow of the company should be $4.4 billion, which would be up from $3.7 billion last year.
Although these numbers have not changed, the outcome from valuing the business definitely did. This is because of the drop in market value of the enterprise, with its market capitalization declining from $41.7 billion when I last wrote about the firm to $37.6 billion today. It is possible that other aspects of the evaluation for the firm, such as net leverage, will have changed from quarter to quarter. But until we have more info from management, guessing that would be speculative in nature. With the data that we have, valuing the company becomes quite simple.
Right now, the forward price to operating cash flow multiple of the company is 7.1. That's down from the 7.9 when I last wrote about the firm. It also compares favorably to the 8.2 multiple we get if we use 2021 results. The price to true free cash flow multiple is slightly higher at 8.6. That stacks up against the 9.5 that I used in my prior article and it's down from the 10.2 reading if we use 2021 results. The price to distributable cash flow multiple of the company followed a similar trajectory, declining to 8 from the 8.9 reading in my prior article, and coming in lower than the 8.6 reading we get using 2021 figures. Using the EV to EBITDA multiple, we get a figure of 9.8. That stacks up against the 10.3 in my prior article and is down from the 10.2 if we use our 2021 results. As part of my analysis, I also decided to compare the company to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 3.3 to a high of 9.2. Three of the five companies were cheaper than Kinder Morgan. When it comes to the EV to EBITDA approach, the range was from 8.1 to 391.2. And in this scenario, two of the five companies were cheaper than our prospect.
Company | Price / Operating Cash Flow | EV / EBITDA |
Kinder Morgan | 7.1 | 9.8 |
The Williams Companies ( WMB ) | 9.2 | 12.3 |
Energy Transfer ( ET ) | 3.3 | 8.1 |
Cheniere Energy ( LNG ) | 7.7 | 391.2 |
MPLX LP ( MPLX ) | 6.1 | 9.6 |
TC Energy Corporation ( TRP ) | 9.0 | 13.0 |
Takeaway
All the data right now suggests to me that Kinder Morgan is looking quite cheap on an absolute basis and is probably more or less fairly valued compared to similar firms. At the end of the day, there might very well be some companies out there in this space that are fundamentally more attractive. One of these is one that I own shares in, a player known as Energy Transfer. But at the end of the day, it is difficult to imagine investors going wrong buying into Kinder Morgan stock. Because of how the company is priced right now and the expectations that analysts have, I have decided to retain my 'buy' rating on the business for now.
For further details see:
Kinder Morgan Q2 2022 Earnings Preview: A Solid Prospect In This Space