Kinder Morgan, Inc. Could Be Primed for Gushing Growth

Advertisement

Pipeline specialist Kinder Morgan, Inc. (NYSE:KMI) will step up to release its fourth-quarter earnings report after the close tonight. But the real story, and potential driver for Kinder Morgan stock, might not be the company’s quarterly numbers. In fact, there are two key drivers that could send KMI stock soaring higher tomorrow following tonight’s report.

KMI Stock: Kinder Morgan, Inc. Could Be Primed for Gushing Growth

First, Kinder Morgan spent 2017 paying down debt and restructuring. The driving force behind this move was to secure financing for the critical, and ambitious, expansion of the Trans Mountain Pipeline (TMPL). Most of the downward pressure on Kinder Morgan stock last year was due to concern that the company wouldn’t be able to complete the TMPL expansion.

But, the company has secured several sources of financing, including the spin-off of  Kinder Morgan Canada Limited (TSX:KML). As a result, many analysts believe that the completion of the TMPL expansion should no longer be an issue.

Second, due to Kinder Morgan’s effective turnaround last year, the company is now looking to return cash to investors. In fact, Kinder Morgan could increase its dividend by 60% this year and by 25% in 2019 and 2020. Furthermore, a potential $2 billion stock buyback is also in the works.

As you can see, any positive news on any of these fronts could be more than enough to extend KMI stock’s rally, even if earnings aren’t as robust as expected.

Speaking of expectations, Kinder Morgan is expected to post a profit of 18 cents per share on revenue of $3.5 billion. Earnings are flat with last year’s results, while revenue should be up 3.4% year-over-year.

Additional drivers can be found in KMI’s sentiment backdrop. For instance, Thomson/First Call reports that eight of the 19 analysts following Kinder Morgan stock rate the shares a “hold.”

Meanwhile, the average consensus price target rests at $22.29, leaving plenty of upside until the stock hits valuation concerns. But, valuation shouldn’t be a concern for some time. Kinder Morgan stock is trading at just 9.3 times cash flow, well below its peers’ average of 14.9.

In other words, KMI stock could be in for price target increases if tonight’s report goes well.

Kinder Morgan Stock
Click to Enlarge 
There are some concerns on the technical front, however. Following an impressive rally off its December lows, Kinder Morgan stock is now trading in overbought territory.

Furthermore, the shares are staring up at resistance in the round-number $20 region. The stock has broken out of bear-market territory by reclaiming its 200-day moving average, but resistance and an overbought condition could be limiting.

KMI options traders are not that concerned, however. The February put/call open interest ratio rests at a bullish reading of 0.32, with calls more than tripling puts in the soon-to-be front-month series. Implieds are pricing in a potential move of 6.5% heading into expiration, placing the upper bound at $20.25 and the lower bound at $17.75.

2 Trades for Kinder Morgan Stock

Call Spread:  Traders looking to take advantage of Kinder Morgan’s upside, while discounting a bit of volatility following tonight’s quarterly report, might want to consider a Feb $20/$21 bull call spread. At last check, this spread was offered at 12 cents, or $12 per pair of contracts.

Breakeven lies at $20.12, while a maximum profit of 88 cents, or $88 per pair of contracts — a potential 630% return — is possible if Kinder Morgan stock closes at or above $21 when February options expire.

Put Spread: On the other hand, profit taking could emerge following tonight’s report — especially if there is no news on the TMPL front or hints at dividend increases or stock buybacks. Flat to even slightly better earnings could prompt a round of profit taking, sending Kinder Morgan stock lower.

Traders looking for such an outcome should consider a Feb $18/$19 bear put spread. At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $18.77, while a maximum profit of 77 cents, or $77 per pair of contracts — a potential 230% return — is possible if Kinder Morgan stock closes at or below $18 when February options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/how-to-trade-kinder-morgan-inc-stock-ahead-of-earnings/.

©2024 InvestorPlace Media, LLC