Crestwood Equity Partners (NYSE:CEQP) was the best-performing master limited partnership (MLP) in 2018 by a wide margin. MLPs, on average, produced a negative 12.7% total return last year. Crestwood, on the other hand, generated a market-crushing 17% total return. It has continued outperforming in 2019 and has already delivered a 25% total return, compared with 16% from the average MLP.
I've been along for nearly that entire ride since I couldn't resist buying Crestwood early last year. While a lot has changed since then, the company remains a compelling investment opportunity. That's why I recently added to my position. Here are the three main factors that drove me to boost my stake despite the huge run.
1. A rock-solid high yield
When I first bought Crestwood last January, it yielded an eye-catching 9.5%. As an income-lover, I found that payout hard to resist after looking closer at the numbers. At the time, the company was covering that payout with cash flow by a comfortable 1.4 times, and its leverage ratio stood at a conservative 4.1.
While leverage crept up a bit last year to 4.25, distribution coverage has continued improving and should be between 1.4 to 1.6 this year. That will allow Crestwood to retain more cash so that it can finance a larger portion of its expansion projects while maintaining a comfortable leverage ratio of less than 4.5 this year. The company's distribution -- which still yields an attractive 7% even after the significant rise in its unit price -- is on an even more sustainable footing. That's exactly what I want to see from my income-focused investments and was a big reason I added to my Crestwood position.
2. Peer-leading growth prospects
Crestwood Equity spent $332 million on high-return expansion projects last year, which helped turn around its financial results by mid-year as they came online and started generating cash flow. The company expects to invest another $275 million to $325 million on expansions this year. Given that long-term, fee-based contracts back these expansions, Crestwood anticipates that they should grow its earnings and cash flow at a mid-teens rate this year. Meanwhile, the company has a few more projects in development, which position it to continue growing at a double-digit pace next year.
Overall, the company is on track to deliver 15% compound annual earnings growth over the next two years, which is the third fastest rate in its peer group. Meanwhile, Crestwood sees cash flow per unit expanding at an even faster 17%-plus compound annual rate over that timeframe, which leads the way among rivals. That top-tier growth rate from such a high-yielding stock is a rarity, giving me another excellent reason to increase my stake in Crestwood.
Check out the latest earnings call transcript for Crestwood Equity Partners.
3. The valuation remains attractive
When I initially invested in Crestwood, it sold for about 8.6 times estimated cash flow for 2018. That made it an incredible bargain, since most MLPs sold for around a mid-teens multiple of cash flow. The discount has narrowed somewhat, given that Crestwood's unit price has rallied 33% since the start of 2018. However, it's still pretty cheap at about 9.5 times estimated 2019 cash flow, which gives it the second lowest valuation in its peer group.
That valuation disconnect doesn't make much sense considering how fast Crestwood expects to grow over the next two years. It's why I had no problem adding to my position even after the recent run in the unit price.
It's still an excellent all-around investment
While Crestwood has rallied sharply over the past year, the MLP remains an attractive investment. That's because the long-term sustainability of its payout has improved, it's on track to grow earnings at a top-tier rate, and its valuation remains attractive when factoring in that growth. That's why I recently took my advice and bought some more Crestwood Equity Partners.