Energy infrastructure behemoth Kinder Morgan (KMI +0.34%) expects to generate $5 billion, or $2.20 per share, in cash during 2019, putting it on track to exceed the previous high of $2.14 per share in cash flow set in 2015. However, while the company's cash flow is on pace to exceed its peak, its share price currently sits 60% below where it traded that year, putting the pipeline giant in deep value territory. That's why it's my top choice for value investors this year.
Check out the latest Kinder Morgan earnings call transcript.
Cheap by every measure
Kinder Morgan currently trades for around $17.25 per share. At that price point, the stock sells at less than eight times cash flow. That's right near the bottom of the barrel within its peer group and well below the 9.8 times average of its rivals. To put that discount into perspective, if Kinder Morgan's stock traded in line with the peer average, shares would be higher by more than 25%. Meanwhile, if shares sold for the 20 times cash flow they fetched in 2015, the stock's upside would be more than 150%.
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The entire energy infrastructure sector, meanwhile, trades at a meaningful discount to the overall market. On average, Kinder Morgan's peers sell for a enterprise value (EV)-to-EBITDA ratio of 11.2, which is another common metric to value stocks. That's well below the sector's historical average and significantly below the current 15.6 times multiple of the S&P 500. Kinder Morgan, meanwhile, trades at a meaningful discount to both its peers and the market given that its current EV/EBITDA ratio is 9.6.
Why Kinder Morgan could start closing the gap in 2019
The reason Kinder Morgan's stock plummeted from its peak in 2015 was due to worries that its financial situation was deteriorating. The company came dangerously close to losing its crucial investment grade credit rating after its leverage spiked to a dangerously high debt-to-EBITDA ratio of 5.9. That led the company to slash its dividend so that it could conserve cash and avoid that fate.
Kinder Morgan has come a long way since that time. It cut spending, sold assets, and made a series of other strategic moves to get its financials back on solid ground. As a result, the company's debt-to-EBITDA ratio ended last year at a more comfortable 4.5, which enabled it to receive a credit rating upgrade. Additionally, it has started increasing its dividend while its cash flow is not only growing again but on pace to eclipse 2015's peak.
However, despite all that progress, shares of the pipeline giant remain in value territory. That could begin to change in 2019. One catalyst that could propel the stock higher is if the company continues to secure additional growth projects to replace a big one it jettisoned last year. Kinder Morgan took steps in that direction during 2018 as it locked up $2.5 billion of expansion projects. Meanwhile, the company has several others in development. If it can secure more expansions this year, it would give investors a clearer picture of the company's long-term growth prospects, which would remove some of the weight holding down the stock.
In addition to that, the company expects to clear up the uncertainty regarding its publicly traded Canadian subsidiary Kinder Morgan Canada (KML +0.00%) by around the end of the first quarter. The company is exploring all options for that entity, including merging it with another midstream company, selling it to a third party, taking it private, or continuing to operate it as a separate entity. This decision will give investors a clearer picture of Kinder Morgan's future since a cash sale, for example, would give it more money to potentially buy back its cheap stock, while a merger could improve the overall company's growth prospects.
A third catalyst, though one that's less likely to come to pass, is a potential sale or spin-off of the company's oil business. Kinder Morgan is reportedly exploring its options for this business, which isn't the first time. Given that investors and analysts have long questioned the strategic fit of these assets, the company might finally move forward with a plan to separate the business. An outright sale would bring in cash that the company could use to buy back stock, while a spin-off would create two pure-play companies, one focused on energy infrastructure and the other on producing oil by injecting carbon dioxide into legacy fields in Texas. Because the oil business's exposure to commodity prices has weighed on Kinder Morgan's cash flow, jettisoning the unit could provide a big boost to the stock price.
Clear upside that's waiting for the right catalyst
Kinder Morgan's stock is dirt cheap both compared to its peer group and the broader market even though the company has worked hard to fix what was holding it down. It will likely continue pushing forward on initiatives to find the right catalyst so that it can boost shareholder value in 2019. That's what makes Kinder Morgan such a compelling value stock to buy this year.
