Pipeline Stocks Hennessy Advisors Bought in the Fourth Quarter
Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hennessy Advisors, Inc. is a fast-growing publicly traded investment firm that manages a set of formula-driven mutual funds called the Hennessy Funds. It is headed by Neil Hennessy, a multi-year lister at Barron’s Top 100 Managers. In October 2012, the Novato-based firm successfully acquired ten investment funds formerly managed by FBR Funds. This move has increased its assets under management by 287% and fully diluted earnings per share by an outstanding 333-percent rise at the end of December 2012.
Hennessy went on a buying spree of energy infrastructure stocks in the latest quarter. In fact, the top 5 companies in its portfolio are all pipeline stocks. Let us take a look at these biggest buys of Hennessy Advisors. These are Williams Companies, Inc. (NYSE: WMB), Kinder Morgan, Inc. (NYSE: KMI), Enbridge Inc. (NYSE: ENB), Spectra Energy Corp. (NYSE: SE), and TransCanada Corp. (NYSE: TRP). I analyzed each of these stocks from a fundamental perspective to see if they are worth the attention they get from Hennessy Advisors.
Source: Whalewisdom.com and Finviz.com, as of Jan. 18, 2013
Williams Companies has just been reiterated by TheStreet Ratings as a buy, with a B- score. The Oklahoma-based company, which operates a combined 26,000 miles of energy-related pipelines, recently announced a higher dividend payment to be paid in March this year. This is in line with the company’s plan to raise the payout every quarter.
Hennessy bought 1,093,892 new shares of this $23.4-billion company in the fourth quarter. The Williams stake tops the firm’s portfolio at 2.06%. It has been a great year for the company. Its EPS grew almost eight-fold this year, and in the next 5 years investors can also look forward to roughly 12 percent annual growth in EPS. WMB lures investors for being a shareholder-friendly corporation, as shown by its yield of 3.74%. In fact, it has an outstanding dividend record. Within the last two years, annualized dividend ballooned by an average annual growth rate of 45%, and roughly 21% in the last 6 years. It’s very easy to get attracted to such performance. However, what I worry about is the debt level. The quarterly debt-equity ratio of 1.588 for Q3 in 2012 was 44% higher than that for the same quarter in 2011. The latest data on its long-term debt-equity ratio (mrq) is 3.08. At this level, there has to be significant positive movements in its revenues soon for me to feel that the company can sustain its dividend growth in the long term.
Kinder Morgan, Inc., the Houston-based energy transportation and storage assets company, has recently announced a higher cash dividend of $0.37 per share to be paid in February. This payout marks a 19 percent increase from that of the fourth quarter in 2011. Like WMB, KMI enjoyed significant growth in 2012 as well. Its earnings per share tripled this year, growing by 238.13%, based on Finviz.com. This is attributed to a strong performance of Kinder Morgan Energy Partners, L.P. (KMP), and contributions from KMI’s transaction with El Paso Corp. and El Paso Pipeline Partners, L.P. Expectations for the future are high as well; EPS is estimated to grow by an outstanding 60% next year. Moreover, KMI has lower debt levels than before. The debt-equity ratio for the end of December 2012 was down by about 43% from the same period a year ago. With these, a double-digit margin, and high dividend yield, I do not doubt Hennessy for buying over 1.011 million shares of KMI in the latest quarter.
Enbridge Inc. is a Calgary-based transporter and distributor of crude oil and natural gas mainly in North America. Hennessy initiated a large position in Enbridge in the fourth quarter. The stake comprised 2.05% of the fund manager’s total portfolio.
Enbridge has announced several huge expansion plans towards the end of 2012. One of these is to build a cross-Canada pipeline for the transportation of crude oil for shipping to Asian markets. The shifting away of US oil demand to look for sources next door is providing great opportunities for Canadian companies like Enbridge. Moreover, the 50/50 JV namely Seaway Crude Oil Pipeline Company that ENB has with Enterprise Products Partners, has completed the first Seaway oil pipeline expansion project. The Cushing-U.S. Gulf Coast pipeline now has a capacity of 400,000 barrels per day from 150,000. I believe Enbridge is a powerful growth stock that you should not miss. Its EPS is growing consistently at 12%, and this is likely to be sustained in the years ahead. ENB is likewise making notable improvements in terms of managing its debt levels in relation to its equity.
Spectra Energy Corp., a Houston-based company engaged in storage and transport of natural gas, owns approximately 62,000 miles of pipelines. Recently, it closed a 25-year deal with Eastman Chemical Company involving its pipeline operation in the Eastman Kingsport facility in Tennessee. This is a highly profitable company, and surely Hennessy saw this. If not, the firm would not have bought over 1.299 million new shares of Spectra in the fourth quarter. The holding was equivalent to 2.05% of the firm’s total portfolio.
SE has an impressive profit margin at 21.61%. In terms of earnings per share, investors can expect a decent growth of 10.8% next year. Also, Spectra has a high dividend yield, at 4.49%, and has been consistently paying stable and increasing dividends since 2007. Among the top 5 stocks of Hennessy, Spectra Energy has one of the lowest debt-equity ratios at 1.12, and the lowest PE ratio at 17.66.
The Calgary-based energy infrastructure company operating in North America has been recently awarded a $5 billion deal by Progress Energy for its Prince Rupert Gas Transmission project. This is a part of Progress’ plans to export liquefied natural gas to Asian markets. Essentially, this project will boost TransCanada’s growth potential. Hennessy bought new 751,618 shares of TransCanada stock in the fourth quarter of 2012, making it the fifth-biggest buy.
Indeed, the fundamental numbers can excite any investor seeking growth, profitability, and financial strength. TransCanada has enjoyed EPS growth of 21.81% this year, and this will likely be sustained in the coming year (it's estimated EPS growth is 21.30%). The profit margin is an impressive 18.68%, and its debt-equity ratio of 1.11 indicates a sound financial standing. Moreover, TRP's annualized dividend payment has been growing by an average rate of 19% in the last 3 years. Among Hennessy's biggest buys, this one attracts me the most.
Hennessy Advisors is riding the growth path of these pipeline companies at this time of a US energy boom and continuous surge of Canadian oil export to the US. These companies are all on their feet to supply whatever infrastructure is necessary to satiate the needs of a fast-growing sector. This is therefore not a time to waste. Investors must take this moves seriously to take advantage of the energy boom, which can only mean huge profits!
aubrey1102 has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and Spectra Energy.. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!