2016 is looking like a fantastic year to own Kinder Morgan (NYSE:KMI) stock.
Kinder Morgan shares have gained 47% so far this year, and you can thank Warren Buffett for a lot of that gain. In February, news broke that Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) had plowed $400 million into the shares, giving the stock an immediate 10% boost.
The stock hasn't looked back since, tacking on 25% more profit since the Buffett news broke. Today, Kinder Morgan shares are rising once again on news that investment banker Morgan Stanley is upgrading the shares.
Here are three things you should know about that.
1. Well, nobody knows
The first thing to know about why Morgan Stanley likes Kinder Morgan is that...no one knows much about why Morgan Stanley likes Kinder Morgan. On Thursday, StreetInsider.com the analyst upped its rating on Kinder Morgan stock to overweight, and raised its price target from $23 to $24. But that's the extent of what we were able to learn there.
Over at TheFly.com, the word is that Morgan Stanley likes the improving "credit metrics" at Kinder Morgan, and sees "better cash flows" emerging -- but not until 2018. All of this paints a picture of an improving business with a better balance sheet, but details remain few and far between.
2. Bigger is better
So what do we know for sure? Well, we know that Kinder Morgan is a one-of-a-kind company. The largest oil and gas pipeline company in the nation, Kinder controls pipelines crisscrossing the country across a combined 84,000 miles. It's also the largest independently owned terminal operator in America.
3. An "oil" company independent of the price of oil
Speaking of independence, another thing we know about Kinder Morgan is that -- and this is curious for a company in the oil and gas trade -- Kinder Morgan's business isn't really affected much by the price of oil. One of the reasons Buffett's Berkshire bought it, after all, may be Buffett's well-known fondness for "toll booth" companies -- businesses that charge a set fee based on how much goods and services move through their domains, regardless of the value of said goods and services.
Charging for transit of oil and gas through its pipes, Kinder Morgan is just that kind of business. As the price of oil plummeted more than 60% from 2014 through 2015, Kinder Morgan's revenue slipped only 11%, and its cash flow and gross profits actually increased. (True, net profits fell, but only because of a large goodwill impairment.)
One final thing: Where's the cash?
Of course, all of the above was well known about Kinder Morgan long before Morgan Stanley decided to upgrade it. And none of this seems to have factored into the one thing we know about what Morgan Stanley's actual reason for upgrading: The supposed improvement in cash flows in 2018, and their effect upon the balance sheet. So what do we know about that?
Well, at the same time as oil prices were falling last year, we know that Kinder Morgan's cash flows increased -- from $4.5 billion to $5.3 billion. We know that currently, cash flows are waning -- down to $5.1 billion booked over the past 12 months. And we know that capital spending ate up a big chunk of that cash -- $2 billion -- leaving Kinder Morgan with trailing free cash flow of $3.1 billion.
Most analysts who follow the company anticipate rising capital expenditures to continue to eat away at Kinder's free cash flow over the next two years, as capex surges to $3.4 billion this year, then rises to $3.5 billion in 2017, and $4.1 billion in 2018. After that, however, analysts quoted on S&P Global Market Intelligence expect capital expenditures to wane again, freeing up more cash to -- as Morgan Stanley says -- improve Kinder's "credit metrics."
In the meantime, in between time, however, it's entirely possible that Kinder Morgan's free cash flow numbers are going to look quite ugly, and for quite some time. Even if Morgan Stanley is right about cash flows improving in 2018, therefore, and even if that's a year ahead of schedule, it still seems to me a long time to wait.
I fear the time to buy Kinder Morgan stock is not yet now.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 301 out of more than 75,000 rated members.
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