I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: MarkWest Energy Partners (NYSE: MWE). Is this natural gas supplier the real thing? Let's get right to the numbers.

Foolish facts

Metric

MarkWest Energy Partners

CAPS stars (5 max) ****
Total ratings 345
Percent bulls 95.9%
Percent bears 4.1%
Bullish pitches 45 out of 45
Highest rated peers Spectra Energy, Kinder Morgan Energy, Energy Transfer Partners

Data current as of Oct. 24.

Fools are positive on MarkWest at an interesting time. On Thursday, U.S. natural gas fell to a new low for the year after the Energy Information Administration reported inventories expanded more than expected.

But is this really a concern for long-term investors? Not according to Foolish investor NKVD1938: "Not ONE of the big dividend-paying MLPs missed a dividend date from late 2008 to late 2009 when the [natural gas] industry was having its hardest time since about 2002 or so."

Good point. MarkWest has paid out $170.6 million in dividends over the past 12 months, and is on track to pay out roughly $183 million in 2010. That's a 6.8% dividend yield at current prices, well above the S&P 500's 1.7% average yield.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth (82.2%) Not measurable Not measurable
Revenue growth 25.1% (19.0%) 25.4%
Gross margin 54.0% 52.4% 41.9%
Receivables growth 43.2% 46.6% (27.0%)
Shares outstanding 71.4 million 66.3 million 56.6 million

Source: Capital IQ, a division of Standard & Poor's.

There's more to like in this table than it would at first seem, but problems remain. Let's review:

  • While normalized net income growth is nowhere to be found, revenue has improved from 2009's downward trend. Returns on capital have also improved.
  • Receivables have grown faster than revenue in each of the past two years, but the gap has narrowed over the past year.
  • Best of all, gross margin is up 12 percentage points since 2008. Fast-rising revenue combined with expense controls appears to be responsible for the shift.
  • The rise in shares outstanding is a problem, reflective of a business that needs to raise capital to fund operations. Too harsh? I'm not so sure. According to Capital IQ, MarkWest hasn't produced free cash flow since 2006.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

DCP Midstream Partners (NYSE: DPM) 10.8%
Dynegy (NYSE: DYN) Not measurable
Inergy (NYSE: NRGY) (0.7%)
MarkWest Energy 27.1%
OGE Energy (NYSE: OGE) 8.3%
Williams Cos. (NYSE: WMB) 4.4%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Oct. 20.

This table speaks well for MarkWest. No peer has grown as fast over the past three years, and only DCP is in double digits. If MarkWest can perform this well in a historically poor period for natural gas and keep paying a substantial dividend, there's no reason to doubt its ability to continue to outperform.

Grade: Unsustainable
Or is there? At some point, MarkWest is going to have to generate free cash flow from its underlying business. Call me when that day arrives. That's when I'll be interested in the stock.

Now it's your turn to weigh in. Do you like MarkWest Energy Partners at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

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