Enbridge Shares Rally Toward 52-Week High: Buy the Strength or Wait?

Enbridge Inc. ENB shares are quickly climbing toward its 52-week high of $50.54, closing at $47.13 on Jan. 20. Notably, the stock has also outperformed its industry peers, including Kinder Morgan Inc. KMI and Enterprise Products Partners LP EPD, gaining 5.7% over the past six months compared with gains of 3.1% for KMI and 5.1% for EPD.

Enbridge is a prominent name in the midstream energy sector, operating an extensive crude oil and liquids transportation network and gas transportation pipelines, while also maintaining a presence in renewables and utility businesses. The company’s strong fundamentals with a stable business model highlight Enbridge’s defensive characteristics within the energy sector.

However, before offering any investment advice, it would be wise to closely look at the company’s fundamentals.

Stable Business Model Supported by Take-or-Pay Contracts

ENB’s midstream business is highly stable, owing to its contractual nature. In fact, 98% of its EBITDA is supported by long-term “take-or-pay” contracts, which shield it from commodity price volatility. This implies that shippers are expected to pay even when they do not use capacity. Additionally, the company has highlighted that more than 95% of its customer base comprises investment-grade companies.

Furthermore, Enbridge’s acquisition of U.S. gas utilities is contributing positively to its EBITDA. The utility business adds another layer of stability to its operations, resulting in predictable earnings supported by regulated rates and long-term agreements. Thus, the company’s earnings are expected to remain stable with minimal exposure to fluctuations in commodity prices.

Large Pipeline of Growth Projects

Enbridge has a disciplined approach to capital allocation, prioritizing brownfield projects backed by strong energy demand fundamentals. At the end of the third quarter, the company announced that it had added $7 billion to its secured project backlog year-to-date. Furthermore, the company had approved secured capital projects worth $35 billion, which are expected to enter service by 2030. These growth projects are spread across its four operating segments, including Liquids Pipelines, Gas Transmission, Gas Distribution & Storage and Renewables. These projects are also backed by strong energy fundamentals and are expected to provide earnings and cash flow visibility through the end of this decade.

Time to Bet on the Stock or Wait?

Enbridge’s stable business model, supported by long-term take-or-pay contracts, and its pipeline of growth projects are expected to continue generating stable and predictable cash flows. This will enable the company to continue investing in opportunities that will help meet the rising demand for energy and support a steadily growing dividend.

However, ENB’s current valuation indicates that the stock may be overvalued, at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 14.99X, above the broader industry average of 13.9X. Notably, Kinder Morgan and Enterprise Products currently trade at a trailing 12-month EV/EBITDA of 13.88X and 10.64X, respectively.

Therefore, investors should wait for a more opportune moment as ENB, carrying a Zacks Rank #3 (Hold), is currently overvalued. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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

Zacks Investment Research