Enterprise Products Partners (NYSE: EPD ) It’s been a wild ride lately. It has gone through some stunning peaks and troughs and is up 7.82% year to date. As a result, investors may wonder whether its current share price represents a good entry into buying the stock.
So let’s examine the bull and bear case for investing in EPD and see if we can piece together its valuation.
Wall Street’s opinion of a given stock is a good starting point when determining whether it is undervalued. As stated therein Market Beat A consensus price targetAt $30.50, EPD has a 24.95% potential upside. Additionally, eleven analysts have rated the stock with a consensus rating of moderate buy.
Other aspects of EPD’s fundamentals are also substantial, including some of its insiders buying shares and its low short interest rate. Insiders bought $248,000 worth of stock last quarter and it has a short interest rate of 1.63%.
Then there is the macro background of EPD, which has improved significantly since the start of the war in Ukraine and mainly due to Russia stopping its Nord Stream 1 launch to Europe. In July, the International Monetary Fund (IMF) wrote that Russia had cut off natural gas to the region. Europe’s economic output could slow Up to 6 percent.
That means alternative hydrocarbon suppliers like EPD are poised to see increased demand in the region to make up for the shortfall. As geopolitical tensions between Russia, China and NATO continue to rise, energy companies aligned with the West could benefit from a strong tailwind of support.
Some weaknesses in the fundamentals and backgrounds of EPD need to be explored.
The first is that its dividend is cited as one of its main drawcards for buying shares. EPD has increased its dividend for 24 consecutive years and is on track to become a dividend aristocrat.
However, the problem lies with its dividend coverage ratio, which currently stands at 81.90%. This means that the company pays a substantial amount and proportion of its net income as dividends to shareholders, which would not be sustainable under normal business conditions.
EPD may cut its dividend within the next few years, ending its dividend growth trajectory. However, a plausible thesis is that the company will divert some of its earnings in dividends to offset its capital expenditures, leading to higher returns for shareholders later on. This means that EPD can further exploit two opportunities, including gas shortages in Europe.
Another catalyst is the world’s energy transition to renewable energy, which will be facilitated first by increasing demand for hydrocarbon products. These are compelling reasons for EPD to consider shifting its spending to infrastructure due to the rapidly increasing total addressable market for its output.
The final reason is that natural gas does not fit the renewable energy paradigm and will eventually be replaced by cleaner and more efficient energy sources such as green hydrogen and nuclear fusion. That means that while natural gas stocks like EPD may rise over the next decade, they offer only an interim solution to reducing carbon emissions. Their preference may soon wear off as better energy technologies develop further.
The question is long-term and a potential upside rather than opportunity cost. In other words, is it better for investors to pay a premium for natural gas stocks to get quick returns, or will the energy market ultimately invest in lower prices?
For example, uranium stocks generally have lower valuation ratios than natural gas stocks, and hydrogen stocks are relatively bargains. Investors who wait out this multi-decade time frame to pick up hydrogen and uranium stocks are taking on more risk, which is always a factor to consider.
EPD has momentum to continue its rally in the short term, and in the medium term, it will benefit from two solid catalysts in its macro backdrop. However, investors should consider their investment horizons and risk tolerance, as natural gas is not the intended solution to the world’s energy needs. There are less expensive stocks to buy that fit this solution that have more significant (as well as more speculative) upside potential than gas stocks like EPD.
Before you consider Enterprise Products Partners, you need to ask this.
MarketBeat tracks Wall Street’s top-rated and best-performing research analysts and the stocks they recommend to clients on a daily basis. As MarketBeat identified Five stocks Top analysts are whispering to their customers to buy now, before the broader market catches up…and enterprise products are off the list of partners.
Enterprise Products Partners currently has a “moderate buy” rating among analysts, with top analysts believing these five stocks are top buys.