– By GF Value
The stock of Enterprise Products Partners LP (NYSE:EPD, 30-year Financials) shows every sign of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $23 per share and the market cap of $50.2 billion, Enterprise Products Partners LP stock shows every sign of being fairly valued. GF Value for Enterprise Products Partners LP is shown in the chart below.
Because Enterprise Products Partners LP is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which is estimated to grow 0.18% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Enterprise Products Partners LP has a cash-to-debt ratio of 0.04, which ranks worse than 85% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Enterprise Products Partners LP’s financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Enterprise Products Partners LP over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Enterprise Products Partners LP has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $27.2 billion and earnings of $1.71 a share. Its operating margin of 16.90% better than 81% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Enterprise Products Partners LP’s profitability as fair. This is the revenue and net income of Enterprise Products Partners LP over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Enterprise Products Partners LP is -3.1%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth is 7.9%, which ranks in the middle range of the companies in Oil & Gas industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Enterprise Products Partners LP’s ROIC was 8.32, while its WACC came in at 8.15. The historical ROIC vs WACC comparison of Enterprise Products Partners LP is shown below:
In conclusion, Enterprise Products Partners LP (NYSE:EPD, 30-year Financials) stock shows every sign of being fairly valued. The company’s financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Enterprise Products Partners LP stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.