German Soccer Can Teach You About Retirement Planning

The recent World Cup victory by Germany was the product of a long-term plan that included fundamental skill development for young players. US investors can learn from this: Long-term investment horizons and a focus on a company's fundamentals often pay off, too. Here are three master limited partnerships with good business and financial fundamentals to consider for your retirement planning.

Jul 24, 2014 at 4:29PM

In an earlier article, we saw how the World Cup winning German soccer team was the product of 14 years of patience and fundamental skill development, and used these ideas to examine some quality energy investments for retirement planning. Here, we'll look at master limited partnerships, or MLPs. MLPs require a different set of metrics since they are required by law to pay out most of their profits to investors.

Specifically, we'll look at distribution coverage ratio (DCR), debt/EBITDA ratio, and price to distributable cash flow ratio (price/DCF). Of course, the core business needs a good look, too. Here are three MLPs to consider.

Classic midstream company
Moving resources from point A to point B -- many companies do that. What sets Magellan Midstream Partners (NYSE:MMP) apart is what it moves. Most midstream energy companies move crude oil and natural gas; Magellan mainly moves refined products. Magellan claims to operate the longest refined petroleum products pipeline system in the US. In fact, over 70% of Magellan's business is transporting refined products, with the balance being crude oil and marine terminal storage. 

Two business fundamentals makes Magellan attractive. First, over 85% of its business is fee-based, meaning a steady revenue stream with limited exposure to commodity price fluctuations. Second, the company plans organic growth rather than acquisitions. This growth includes expanding its crude oil capacity in the productive Permian Basin and Eagle Ford plays. Additionally, the company is building a condensate splitter at its Corpus Christi facility. This splitter can produce a variety of products, including high-sulfur diesel for export to Latin America.

Augmenting these business advantages are excellent financial metrics. For MLPs, debt is a constant feature since profits are mostly paid out. Typically, a debt/EBITDA ratio of 4.0-4.5 or lower is desirable. For Magellan, the ratio is 3.0. Looking at DCR, a ratio of 1.0 indicates sustainable distributions and Magellan's DCR comes in at 1.1 to 1.4 over the past year -- no problems there. For valuation, look for a price/DCF ratio of 16. Magellan sells at a ratio of 26.9, indicating an expensive MLP. It also indicates a lot of investor confidence, however.

The ultimate "pick and shovel" play?
Hydraulic fracturing needs sand -- lots of it -- and Hi-Crush Partners (NYSE:HCLP) supplies some of the most popular types of sand used in hydraulic fracturing. Beyond just digging sand out of the ground, Hi-Crush transports its sand to some of the most active oil and gas plays in the country.

Hi-Crush offers investors constant growth. Every month it seems the company announces another new or expanding long-term contract to supply sand to yet another customer. The latest new customer is C&J Energy Services. This growth translates into growing distributions, with the latest distribution growing 9.5% over the previous quarter's distribution.

The financial fundamentals look good, too. Hi-Crush boasts a low debt load with a debt/EBITDA of 1.9. The growing distribution is covered by a DCR of 1.0-1.2. Like Magellan, investors have noticed Hi-Crush's strong business basics and are willing to pay a 31.8 price/dcf for the company. The stock has more than doubled over the past year.

Natural gas liquids for home and abroad
Another midstream MLP to consider is Targa Resources Partners (NYSE:NGLS). This company stores, transports and exports crude oil, natural gas, and natural gas liquids such as butane and propane. The main focus of the company is on natural gas and natural gas liquids. One important trend in Targa's business model is the increase in fee-based contracts. In 2010, roughly 25% of Targa's business was fee-based. Today it's closer to 60%, and by the end of the calendar year, Targa aims for 65% fee-based contracts.

Targa has $1 billion in expansion projects coming online in 2014. These projects include increasing processing capacity in the Bakken, Permian Basin, and Barnett shale plays; increasing storage capacity at its Mont Belvieu facility; and increasing export capacity at its Galena Park Marine Terminal. By the end of 2014, Targa's export capacity should grow by 50%. These 2014 projects follow roughly $1 billion worth of growth in 2013.

Regarding financial metrics, Targa holds one advantage over Magellan and Hi-Crush: its price/DCF is only 18.4, making Targa a better value. The other metrics hold up as well: Targa's debt/EBITDA typically runs 3.7 with its latest quarter coming in at 3.0. The DCR is 1.6, indicating not only some buffer for distribution increases, but some cash in the bank to pay for expansion.

Final Foolish thoughts
Fourteen years of teaching young players the fundamentals of the game helped Germany win a World Cup. Paying attention to fundamentals and having a long-term investment horizon can pay well when retirement comes. While all three MLPs here offer attractive returns, Targa's low valuation makes it stand out. The core business, particularly its exports of natural gas liquids, should grow and propel distributions by 7% to 9% a year. This company has room to run and could take your retirement income with it.

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Robert Zimmerman owns stock in Hi-Crush Limited Partnership. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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