The stock of Kinder Morgan (KMI 0.40%) has been scorching hot this year. Shares rocketed 30% during the first quarter -- reaching $20 -- fueled mainly by a rebound in the oil market, which had its best quarter in a decade.
That big-time rally has Wall Street analysts beginning to cool on the company's stock, with several downgrading it in the last week on the belief that it's running out of gas. Driving that view are concerns about its valuation and a perceived lack of catalysts.
While it's true that Kinder Morgan isn't the deep value it was to start the year, shares remain relatively cheap. Meanwhile, quite a few potential catalysts are on the horizon that could reignite enthusiasm in the stock. That's why I think Wall Street is wrong about Kinder Morgan, which still looks like a good buy right now in my opinion.
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Drilling down into the downgrades
J.P. Morgan started the downgrade parade about a week ago when it cut shares from overweight to neutral while setting a $21 price target. The bank made that call due to its view that Kinder Morgan now has a more balanced risk/reward profile and less upside potential than its rivals. One of Morgan's concerns is that the company has a lower earnings growth profile compared with its peers, which is due in part to its decision to abandon the controversial Trans Mountain Pipeline expansion project in Canada.
Citigroup and Goldman Sachs have piled onto the downgrade bandwagon in the past week. In Citi's case, it cut its rating from buy to neutral, while setting a $20 price target. One driver of that view is that while the company recently locked up two large-scale natural gas pipeline projects in the Permian Basin, Citi said, "it may be some time before other such organic opportunities of scale materialize." Goldman Sachs, meanwhile, removed Kinder Morgan from its conviction buy list due to valuation, though it did keep the stock's buy rating.
Not scraping the bottom of the barrel, but still cheap
One of the main concerns of analysts is Kinder Morgan's valuation, which in their view isn't as attractive as it once was. On the one hand, that's true since Kinder Morgan entered the year trading at less than eight times cash flow, which was the lowest in its peer group. However, after rallying 30%, shares now fetch roughly nine times cash flow. That's still relatively cheap since many peers sell for a low double-digit multiple of cash flow. For perspective, a multiple of 11 times cash flow implies 20% upside in Kinder Morgan's shares.
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Plenty of catalysts to go around
The other concern analysts have with the stock is a lack of clear catalysts that could send shares higher. However, I see a few that analysts seem to be overlooking.
First, the company has been working for the past several months to determine the future of its publicly traded Canadian subsidiary Kinder Morgan Canada (KML). The company initially created that entity to help finance the Trans Mountain expansion, which is no longer the case. As such, it's exploring alternatives for this company, which could include merging it with another Canadian midstream company or selling it to a third party. Either option could boost Kinder Morgan's stock since a merger could improve its growth prospects while a sale would give the company more cash to buy back its cheap stock.
Another catalyst to keep an eye on is that Kinder Morgan has several expansion projects in development. While the company did recently walk away from one growth opportunity, it's currently working on a few oil pipeline projects. One of the largest is a joint development with Tallgrass Energy (TGE) to boost oil transportation capacity out of the Rockies. The company would contribute two underutilized gas pipelines to the joint venture that it would convert to oil service, while Tallgrass would bring its Pony Express Pipeline system. The project could quickly add 550,000 barrels per day of additional transportation capacity to the region, providing a new outlet for oil shippers.
Moving forward with that project could also enable Kinder Morgan to expand its Double H Pipeline system in North Dakota while allowing Tallgrass Energy to build a pipeline and export facility farther downstream. On top of that, the company remains as bullish as ever on the future need for more natural gas-related infrastructure. If Kinder Morgan can secure these and other projects, it would give the market more clarity on how fast the company can grow earnings over the next few years, which could boost its valuation.
It still looks attractive to me
While Kinder Morgan doesn't have as much upside as it did to start the year, shares remain relatively cheap compared with those of its peers. It also has a few catalysts on the horizon that could give the stock a boost. That's why I think shares still look like a great buy in both the near term and long haul.
