It's nice to see a stock where the price has gone up 100%, doubling in value. But that's a backward-looking examination. The real question is: Can a company double in value from the price it's at today? That's impossible to answer without a crystal ball. However, Motley Fool contributors have picked three stocks that look like they have the foundations for such an advance soundly in place: Kinder Morgan, Inc. (KMI +0.72%), MGM Resorts International (MGM +0.26%), and A.O. Smith Corporation (AOS +2.43%).
An energy titan that has already started its recovery
Chuck Saletta (Kinder Morgan, Inc.): Back in 2015, energy pipeline giant Kinder Morgan was trading at more than twice its current stock price. Then, unfortunately, its shares collapsed when Moody's got spooked by the pipeline giant's balance sheet leverage, leading Kinder Morgan to slash its dividend by 75%.
That dividend cut freed up billions in annual cash flows, money that Kinder Morgan put to great use shoring up its balance sheet and funding much of its expansion over the past couple of years. To make a long story short, today's Kinder Morgan is fundamentally and financially in a better place than it was prior to its 2015 dividend cut, yet its shares trade well below where they did then.
Image source: Getty Images.
In addition to its still-strong operations supported by a healthier balance sheet, Kinder Morgan has committed to restoring its dividend. It already increased it by 60% this year, and it expects to increase its dividend by a whopping 25% in each of the next two years, as well. If it delivers on those expectations, it will sport a payout of $1.25 per share per year in 2020.
At its recent share price of $16.30, that would represent a yield of over 7.6%. Even with interest rates on their way up, that represents a substantial yield for a company that's able to deliver both cash distributions and growth. As a result, that dividend path alone suggests that Kinder Morgan's shares have room to increase. Add possible growth beyond its already announced 2020 target, and there's good reason to believe that Kinder Morgan's shares can potentially double from here.
Riding the hospitality growth wave worldwide
Travis Hoium (MGM Resorts): As consumers spend a smaller percentage of their money on things like food, clothing, and household goods, they have more to spend on travel and hospitality. According to the "2017 Travel and Hospitality Industry Outlook" from Deloitte, spending grew as a percentage of all consumer expenditures from about 17.6% in 2011 to 18.4% in 2015. MGM Resorts is riding that macro wave to grow its gaming and hospitality business both in the U.S. and abroad.
You can see in the past five years that MGM has been able to grow revenue and EBITDA, a proxy for cash flow from a resort or casino, while maintaining debt at a reasonable level below five times EBITDA. Improved financials are in part because of growth in travel and hospitality and partly due to an efficient use of capital, using its REIT, MGM Growth Properties, to finance new buildings like MGM National Harbor near Washington, D.C.
MGM EBITDA (TTM) data by YCharts.
What could allow MGM Resorts to double over the next decade is its next wave of growth. MGM Cotai opened earlier this year and that one resort will likely generate over $500 million in EBITDA annually. The $960 million MGM Springfield development will also open in Massachusetts in August.
In the long term, MGM Resorts should generate at least $3 billion in EBITDA annually, cash it can use to fund growth, pay down $13.3 billion of debt, or pay a larger dividend to investors. If travel and hospitality spending continues to increase, I don't see why the company won't be able to grow revenue and EBITDA over the next decade, and if MGM Resorts executes well, the stock could easily double.
A double would be chump change
Reuben Gregg Brewer (A.O. Smith Corporation): A.O. Smith's stock is up roughly 220% over the past five years and more than 900% over the past decade. While I wouldn't expect those outsize gains to continue over the next decade, a 100% price advance seems completely reasonable. How will the company achieve this? By making and selling water heaters.
You most likely take your water heater for granted, but in emerging markets, hot water is an affordable luxury that's in high demand. To put a number on that, A.O. Smith was able to grow revenue in China by 21% a year over the past decade! And there's still room to expand in this country, with the company branching off into air and water purification (two other things you probably take for granted).
But this isn't just about China. The company is looking to use its China playbook as it expands in India. This emerging market is equally as large an opportunity, with A.O. Smith expecting its target customer population in the country to expand by over 250% between 2020 and 2030. Asia is the largest contributor to the company's sales outside of the Americas and should continue to drive solid top- and bottom-line growth for years to come. And with debt at just 15% of the company's capital structure, there's no reason to question A.O. Smith's ability to fund its growth plans.
If India plays out well, the company's stock could easily double over the next 10 years, if not sooner. And you also get to collect a growing dividend along the way. Although the 1.1% yield is modest, Smith has increased it annually for 25 consecutive years (and at a 17% annualized clip over the past decade!).
