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This Top-Notch High-Yield Stock Has Gotten Significantly Cheaper

By Matthew DiLallo – Sep 24, 2018 at 10:21AM

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Earnings and cash flow have risen sharply over the past few years. Its unit price, not so much.

Enterprise Products Partners (EPD 0.78%) has delivered a significant improvement in its financial results since the oil market hit the skids in 2015. However, despite those improvements, the company's unit price has barely budged. As a result, the top-tier master limited partnership (MLP) has gotten noticeably cheaper, which makes it a very compelling stock for investors to consider buying.

Drilling down into the numbers

Enterprise Products Partners' financial results through the first half of 2018 are noticeably higher than they were in the same period of 2015:


First Half of 2015

First Half of 2018


Adjusted EBITDA

$2.6 billion

$3.5 billion


Distributable cash flow (DCF)

$2 billion

$2.8 billion


DCF per unit




Excess DCF

$532 million

$948 million


Enterprise Products Partners' unit price




Data source: Enterprise Products Partners investors presentation. Unit price on Sept. 20.

Fueling that growth is a big uptick in volumes flowing through the company's oil and gas processing facilities, pipelines, and storage terminals. That's due in part to an improvement in drilling activities thanks to higher oil prices, as well as the completion of several expansion projects, with the company finishing $5.5 billion of new assets in the past year and a half alone.

In addition to delivering a notable improvement in earnings and cash flow, Enterprise's financial profile has also strengthened. The company's distribution coverage ratio has increased from 1.3 in 2015 to 1.5 through the first half of 2018, which has the company on track to self-fund a significant portion of its capital expenses by 2019. Meanwhile, its leverage ratio has gone from 4.2 times debt-to-EBITDA in 2015 to 3.9 over the past 12 months. Finally, the company has delivered these improvements while continuing to increase its distribution each quarter, boosting it 13% over this timeframe. As a result, Enterprise now yields 5.8%.

A calculator and pen on top of $100 bills.

Image source: Getty Images.

A stronger company for a much cheaper price

While Enterprise Products Partners' unit price has ticked up a little bit over the timeframe, that single-digit gain pales in comparison to the improvement in the company's underlying financials. To put that into perspective, in September 2015, Enterprise sold for roughly 13.8 times DCF. Today, however, units only sell for around 11.2 times DCF. That valuation is not only well below where it was three years ago, but it's lower than its peer group average, which is currently around 12.2 times DCF. 

Those numbers suggest the company could be as much as 20% undervalued. That doesn't make sense, considering it has strengthened what was already a top-tier financial profile and the oil market has gone from tumbling toward the abyss to clearly being on the upswing. Meanwhile, Enterprise Products Partners still has plenty of growth ahead of it since it has another $5.7 billion of expansion projects currently under construction, which set it up to continue increasing cash flow at a high rate for the next couple of years. Those factors suggest the company should sell for an even higher valuation than it did in 2015. 

All signs point to now being a great time to buy

Enterprise Products Partners is not only earning a lot more money now than it was three years ago but its financial profile has strengthened significantly. Those factors should have driven up the company's unit price. Instead, units have barely budged making Enterprise look quite undervalued at the moment, which is one more reason it's an excellent energy stock to consider buying these days.

Matthew DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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