Has Enterprise Products Partners Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Enterprise Products Partners (NYSE: EPD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind (and understanding that earnings-based valuation measures aren't entirely appropriate for master limited partnerships), let's take a closer look at Enterprise Products Partners.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

23.5%

Pass

 

1-year revenue growth > 12%

1.9%

Fail

Margins

Gross margin > 35%

7.8%

Fail

 

Net margin > 15%

5.9%

Fail

Balance sheet

Debt to equity < 50%

123.7%

Fail

 

Current ratio > 1.3

0.81

Fail

Opportunities

Return on equity > 15%

20.6%

Pass

Valuation

Normalized P/E < 20

30.08

Fail

Dividends

Current yield > 2%

5%

Pass

 

5-year dividend growth > 10%

5.7%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Enterprise Products Partners last year, the company hasn't been able to regain the point it lost from 2011 to 2012. Investors haven't been entirely displeased, though, with a price gain of nearly 10% over the past year supplementing the MLP's lucrative dividends.

Enterprise is a major player in the midstream energy space. Its pipeline network extends more than 50,000 miles, and it also has substantial facilities for production, storage and refining operations.

One big advantage that Enterprise has over natural gas exploration and production companies Chesapeake Energy (NYSE: CHK  ) and SandRidge Energy (NYSE: SD  ) is that Enterprise's revenue increasingly comes from fees on transport and storage that don't vary with the price of energy commodities. Low natural gas prices have forced Chesapeake and SandRidge to move more heavily into oil production, but Enterprise can keep thriving as long as gas and other products flow through its pipelines.

In addition, Enterprise has a somewhat unusual structure for an MLP. While Kinder Morgan Energy Partners (NYSE: KMP  ) and Energy Transfer Partners (NYSE: ETP  ) both have general partners that divert part of their cash flow away from unitholders in the form of incentive distributions, Enterprise doesn't have a general partner. That allows Enterprise to keep more of its money for internal growth as well as investors' distributions.

For Enterprise to improve, it needs to keep its streak of 33 consecutive quarterly payout increases alive while continuing to work on getting its debt levels down. As long as energy production remains a priority for the economy, unitholders should keep enjoying nice payouts.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add Enterprise Products Partners to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On January 09, 2013, at 11:48 PM, RayK1800 wrote:

    8.5% dividend and if you reinvest the divided, ETP gives you a 5% discount on the stock price.

    13.5% return and ETP price should move up in 2013 due to projects being completed.

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