A Pipeline to Financial Success?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the new year draws to a close, I would like to pinpoint a leading pipeline transportation and energy storage company, Kinder Morgan Energy Partners (NYSE: KMP).
- Dividend: At the moment, Morgan pays out quarterly dividends of $1.26, which annualized puts the dividend as yielding a whopping 6.44%
- Predictable and Stable Business Model: Kinder Morgan possesses a very stable and reliable business model, they own miles of natural gas pipelines, and every time this liquid is transported through their pipelines, they receive a fee, giving the company multiple solid revenue streams and with it predictability and certainty
- Diversification: Kinder Morgan owns an interest in about 29,000 miles of pipelines and 180 terminals, adding diversification to the company
- Cash and Equivalents: Currently, the company holds $532 million of cash and cash equivalents on their balance sheets, a minor upside to the business
- Relatively Low Volatility: Kinder Morgan carries a beta ratio of 0.36, representing a company which possesses very little volatility compared to the overall market, an advantage for long-term investors
- Tight Margins: Kinder carries a net profit margin of 0.98%, which is well below the ideal double digit range and leaves little room for unexpected expenditures; these tight margins have resulted from Kinder Morgan's attempt to remain competitive
- Lack of Institutional Confidence: Only 20.81% of shares outstanding are held by institutional investors, displaying an apparent lack of confidence some of the largest investors in the world have in the company and its future
- High Valuation: At the moment, the company carries a price to earnings ratio of 50.52, a price to book ratio of 3.63, and a price to sales ratio of 3.48, all of which indicate a company trading with a high valuation
- Debt: Currently, Kinder Morgan possesses $16.75 billion of debt on their balance sheets, a major downside to the business; this debt has been collected as the company pours billions into expansion plans
- Negative Revenue Growth: In 2006, Kinder Morgan reported revenue of $8.95 billion; in 2011, the company announced revenue of $8.21 billion, representing year over year annual decay of -1.71%, however this trend of negative revenue growth is expected to reverse, with projections placing 2014 revenue at $10.01 billion; this negative growth has been caused by a combination of falling revenues deriving from natural gas pipelines and a slight drop in products shipments through their products pipelines
- Dividend Payout Ratio: In 2011, Kinder Morgan paid out $4.60 in dividends, while only earning $0.30 per share, giving the company a dividend payout ratio of over 1000%, an unsustainable metric
- Expansion in Pipelines: Kinder Morgan has consistently reinvested in its business to expand its pipelines to the production hotspots of the United States, such as the Eagle Ford Shale, and further expansion in the future is an opportunity for the company to boost revenue
- Dividend Growth: Since implementing their dividend program in 1992, Kinder Morgan has consistently raised its payouts, and this trend is widely anticipated to sustain into the future
- Increase in Demand for Natural Gas: The United States, Kinder Morgan’s main country of operation, possesses a growing demand for natural gas, and if the demand for natural gas was further to rise, there would be more of a demand to transport it, boosting revenue for the company
- Growth in the US Energy Industry: A recent international energy agency report predicts that the United States will pass Saudi Arabia as the world’s largest oil producer by 2017, and with growth in the US energy industry will come increased opportunities for Kinder Morgan to expand and meet rising demand
- Acquisitions: In August 2012, Kinder Morgan acquired Tennessee Gas Pipeline and a 50% interest in El Paso natural gas pipeline, and further acquisitions could fuel growth and present significant opportunity
- Tightening Government Regulation: The Obama administration recently rejected the Keystone pipeline proposal, and the same administration is in control of the United States for four more years, which could hurt Kinder Morgan’s expansion prospects
- Competition: The pipeline industry is rather competitive, with several major corporations competing with each other to offer transportation for the least amount of money, and this battle to gain the customers’ business can lead to margin compression
Major publicly traded competitors of Kinder Morgan include Enterprise Product Partners (NYSE: EPD), Energy Transfer Partners (NYSE: ETP), Williams Partners (NYSE: WPZ), and El Paso Pipeline Partners (NYSE: EPB). All of these companies operate or own an interest in pipelines and compete directly with Kinder Morgan. Enterprise Product Partners is valued at $44.53 billion, pays out a dividend yielding 5.28%, and carries a price to earnings ratio of 17.29. Energy Transfer Partners is valued at $12.77 billion, pays out a dividend yielding 8.42%, and carries a price to earnings ratio of 8.27. Williams Partners is valued at $16.78 billion, pays out a dividend yielding 6.84%, and carries a price to earnings ratio of 18.36. Finally, El Paso Pipeline Partners is valued at $7.81 billion, pays out a dividend yielding 6.41%, and carries a price to earnings ratio of 17.74.
The Foolish Bottom Line:
Financially, Kinder Morgan is relatively strong with a few major flaws. The company has experienced revenue decay over the past years, a major downside. Additionally, the company possesses a massive debt load and an unsustainable dividend payout ratio. However, the company’s dividend is massive. All in all, while Kinder Morgan may prosper in the coming years, however a better alternative in the pipeline industry is Enterprise Products Partners, with a more reasonable valuation and stronger financial situation.
makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend El Paso Pipeline Partners LP and Enterprise Products Partners L.P.. 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!