- KMI
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Kinder Morgan, Inc. (NYSE:KMI) closed at $34.20 on October 16. The stock has returned 7.1% over the last 6 months, compared with a 10.5% return for the Insider Monkey Billionaire Index and 9.3% for the State Street SPDR S&P 500 ETF Trust.
Kinder Morgan owns the largest natural gas network in the United States, and the market expects its earnings to go nowhere much. The second half of that is the odd part. The business charges fees to move other people’s gas, which makes the revenue steadier than the commodity inside the pipe. Yet trailing and forward multiples sit almost on top of each other, which is what no expected growth looks like.
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What the Business Has Going for It:
Scale is the first thing. A network this size reaches demand smaller systems cannot, and its contracts are long.
The borrowing is the second, and it is the more surprising one. The company owes 98.62% of its equity, conservative for an industry where most carry far more. A pipeline with less borrowing than its peers has more room to act when something goes wrong.
The recent numbers support the case. Revenue grew 10.80% over the latest three months and earnings 21.30%. Kinder Morgan sits near the top of our 10 Best Pipeline and MLP Stocks to Buy According to Hedge Funds. To see the rest of the list, click HERE.
What the Price Already Assumes:
The gap between the two multiples is the problem. The shares trade at 20.17 times what the company earned and 20.00 times what analysts expect next year. Those two numbers being equal means the market is pricing in essentially no growth at all.
That is a strange thing to assume about the largest gas network in the country at a moment when electricity demand is rising, and gas is how a lot of that electricity gets made. Either the market is wrong, or the extra demand reaches somebody else.
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Good or Bad at This Price:
The yield is 3.45%, unremarkable for midstream and well short of what the partnerships pay. So the case cannot rest on income alone.
What a buyer is really deciding is whether the flat multiple is a mistake. If gas volumes rise with power demand, a business priced for nothing becomes cheap without anything dramatic happening. If they do not, the price is about right, and the yield is the whole return.
A yield this ordinary will not carry the case on its own. 10 Best Dividend Stocks Yielding at Least 5% to Buy According to Hedge Funds gathers the names where the income does the work.
