Enterprise Products Up 6% in a Year: Time to Bet on the Stock or Wait?

Enterprise Products Partners LP EPD has gained 6.1% over the past year against the 7.4% decline of the composite stocks belonging to the industry. Enbridge Inc ENB and Kinder Morgan Inc KMI, two other midstream energy majors, have jumped 10.5% and 1.1%, respectively, over the same time frame.

Although the partnership surpassed the industry’s composite stocks, this is not sufficient for investors to base an investment decision on, even with EPD’s stable fee-based revenue model similar to ENB and KMI. Hence, it’s better to analyze EPD’s overall business environment first.

EPD’s Inflation-Protected Contracts & Key Capital Projects

Enterprise Products' pipeline network spans more than 50,000 miles, transporting oil, natural gas and other commodities. The partnership also has more than 300 million barrels of liquid storage capacity, thereby generating stable cash flows. Importantly, EPD’s business model is inflation-protected because almost 90% of its long-term contracts include a provision for increasing fees when the business environment becomes inflationary. This is how the midstream energy player is able to safeguard its cash flow generation in all business scenarios.

EPD is also expected to generate incremental cash flows from its billions of dollars’ worth of key capital projects, which are either in service or set to come online.

Strong Focus on Returning Capital to Unit Holders

Due to the resilience of its business model, the partnership has been able to return capital to unitholders on an ongoing basis. Since its IPO, Enterprise Products has returned $61 billion to unitholders through both repurchases and distributions. Considering the distribution story, EPD has been successful in increasing distributions for more than two decades consecutively. Thus, the partnership has become successful in keeping cash flow steady at all business cycles.

Investors should know that Enterprise Products has a backlog of key capital projects valued at billions of dollars that are currently under construction. Therefore, the midstream company has secured additional cash flows, further protecting future distribution payments.

What Should Be Investors’ Ideal Move Now?

Investors should note that despite EPD's strong focus on returning capital, the partnership’s current distribution yield of 6.84% is lower than the industry’s 7.06%. Also, EPD has a significant exposure to debt capital. Compared to the energy sector’s 37.63%, the partnership’s debt to capitalization is much higher at 52.77%.

Regarding the valuation story, EPD is trading at a trailing 12-month EV/EBITDA multiple of 10.44x, which is lower than the broader industry average of 10.47x. Enbridge and Kinder Morgan are, however, valued higher at 14.66x and 13.65x, respectively.

Thus, despite being undervalued and with all the positive developments in place, it is wise not to bet on the stock right away. But those who have already invested can retain the stock, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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