After the tumble Kinder Morgan Inc (KMI) has taken in the first few weeks of trading this year, KMI stock is certainly starting to look cheap. Through Jan. 12, the stock was down 9% year to date.
Of course, it also already looked cheap before the January tumble. From its 52-week high to its Jan. 12 low, KMI stock is down a staggering 70%. And this for a company in a very conservative line of work: Operating oil and gas pipelines.
We all know why Kinder Morgan is down. Falling energy prices crimped profits just enough to spook the market, sending the shares lower. The falling KMI stock price essentially created a self-fulfilling prophecy in which it became prohibitively expensive to issue new debt or equity.
Kinder Morgan had a choice between slashing growth and preserving the dividend … or pushing forward with growth projects by slashing the dividend and using the funds internally.
KMI chose growth, which will ultimately prove to be right course of action. Five years from now, investors will be happy they did. But in the meantime, the dividend cut left investors running for the exits.
All of that is history — the question we have today is whether Kinder Morgan has finally hit its bottom.
I’ll be honest with you — I have no idea.
Anyone that says they can call a market bottom with any precision is either delusional or a charlatan … or both. But as value investors, it’s our job to evaluate current prices and make a judgment call. Either the stock is worth a gamble or it’s not.
So, how does KMI stack up?
A Look at KMI’s Fundamentals
I’ll start with an easy one, dividend yield. Kinder Morgan slashed its dividend by fully 75%. But after the shellacking KMI stock has taken, it still sports a very respectable dividend yield at 3.7%. That’s nearly double the S&P 500’s dividend yield and more or less on par with an electric utility.
Yet, the recent liquidity crunch notwithstanding, Kinder Morgan has much better growth prospects than your average utility. This is a company that just a quarter ago believed its growth prospects justified dividend growth of 10% per year through 2020.
Nothing has actually changed on that front, by the way. The underlying business growth should still be there. What changed was Kinder’s access to capital at an affordable rate.
Moving on, let’s look at traditional valuation metrics like price-earnings. These metrics are not generally used for pipeline companies because the large depreciation charges tend to skew GAAP earnings. But let’s take a peek anyway just for grins. KMI stock trades at a forward P/E of 16. That’s not cheap, but it’s roughly on par with the broader utility sector. And as I already argued, KMI stock should trade at a premium to utilities.
Looking at other metrics, KMI stock trades for just 90% of book value. Yes, there is some goodwill built into those figures. But that is still the lowest reading on record for Kinder Morgan, and I would argue that book value is likely overstated due to the effects of accumulated depreciation.
By master limited partnership valuation metrics, KMI stock is absurdly cheap. It trades at just 6 times trailing distributable cash flow per share. To that in prespective, the stock has spent most of its life trading at over 20 times distributable cash flow per share.
Does any of this mean that we’ve officially hit bottom?
Of course not. Cheap stocks can get cheaper. But at current prices — and considering that the dividend has already been cut — your risk of loss at these prices would seem minimal.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management. As of this writing he was long KMI.
