Those who have been following my blog the past few months know one of my favorite companies is Kinder Morgan, Inc (KMI). As much as I like the management, business model, future prospects, and dividend, trying to value this stock is giving me fits. I'm going to go through methods I normally use to put a number to a stock. Suggestions would be most appreciated.
Base Stats:
Ticker: KMI
Share Price: $36.53
Dividend: $1.44 (3.94%)
P/E (ttm): 212.4
P/E (fwd): 26.9
P/B: 2.59
LT EPS Growth: 25%
Discounted Cash Flow Model: $46.44
I used EPS of 1.36 (based off fwd p/e), growth of 25% for 5 years, growth of 4% after 5 years, discount rate of 11%.
Dividend Discount Model: $78.48
I used $1.44 dividend, 9% DGR, 11% discount rate
Graham Number: $20.43
(22.5*1.36*13.64)^.5
5 Year Average P/E: N/A
Wasn't publicly traded the past 5 years
5 Year Average Dividend Yield: N/A
Wasn't publicly traded the past 5 years
Fast Graphs: N/A
Fast Graph looks like nonsense. Wasn't publicly traded the past 5 years
Morningstar Ratings: ***
How are you guys valuing this stock? My numbers are all over the place. What is your target buy price and why?
Hi - I just put the numbers you provided for EPS growth, PE, and EPS into an EPS growth Capitalization calculation and came up with a valuation of $55.51. I'd be very cautious with the numbers you've selected though. As you've noted, there's not much history to go by in making these assumptions. Hope this helps!
ReplyDeleteHey Dustin,
DeleteI really appreciate your feedback. I am a bit weary of the numbers, but it's what I have to work with. I'm concerned about the 25% growth specifically. Again that's how the sources I used (fidelity.com) have it listed.
I'm a huge fan of KMI and want to increase my position in this company. Before I do so I'm trying to figure out solid valuations because this one is tough! In the past I was using a 4% yield as the target, but recently felt the need to be a little more exact. I'm a little weary because KMI is quite a bit different than the normal C-corp shares I tend to purchase. My past MLP investments have been disappointing, I think I might need to revise my strategy a little. KMI is the general partner for the KMP and EPB MLPs. It's technically not a MLP, but is tied to the MLP structure.
Internet bloggers are smart so I was hoping to gain some insight. Hopefully a few more like minded individuals will chime in on the discussion.
CI
I've struggled with this too.
ReplyDeleteHere's a recent article on sa discussing the 3 options.
http://seekingalpha.com/article/1089481-which-stock-is-the-best-for-you-from-the-kinder-morgan-family?source=yahoo
Thanks for link PIP.
DeleteI had read the article that PIP mentioned, it is helpful. One of the reasons I picked KMI was that the general partner has the IDR set up in a way that KMI will be able to grow it's dividend much faster than KMP due to receiving up to 50% of their distributable cash flow.
ReplyDeleteI agree it's still hard to value the company. I do like the business they are in and think it will do well for a long time.
Yes I believe this one is going to be a great investment. I have high hopes for it over the next 10 years or so. With forever stocks like KO, JNJ, PEP, PG I don't worry quite as much about the price I pay. With something like KMI or APD I need to make sure I'm getting decent value because I may end up selling it at some point.
DeleteThe yield on this stock is definitely attractive. However, the PEG ratio and the P/S ratio are somewhat high.
ReplyDeleteThanks Brett!
DeleteCI,
ReplyDeleteI valued KMI like a normal C-corp using a pretty conservative DDM a while back and came up with a fair value of about $40/share. But, that doesn't really factor in the very attractive IDR. Morningstar was somewhere around $38 if I remember right.
Obviously trying to value shares of a company is part art and part science, so I only try to get what I think is below fair value, and obviously the lower the better.
The thing I always look at is what kind of cashflow am I going to receive with an investment, and what's the business model? With KMI, you're getting a 4%+ yield, with a 12+ growth rate. Not much to dislike there. And the business model is lovely. It's not like you can just go out and build a pipeline tomorrow, so the barrier to entry is pretty high. Plus, they are largely shielded from commodity cost risks due to the structure of their revenue base.
Hope that helps.
Best wishes!
Mantra! You are starting to impress me more and more as time goes on my friend! You've obviously learned a lot. I do realize that KMI is difficult to value (if it was normal I wouldn't have created this post). Of course valuing stocks is never exact, but it's better than buying based on gut feelings or trends.
DeleteI was particularly interested in the morningstar valuation as I cannot access it. They say $38? That is excellent information to have. Build in a 10% MOS and we're back to $35, the price I have been using all along.
I'm somewhat skeptical of the DDM here. Most of the time I find that whenever a stock has a dividend growth rate over 10% it screws up the calculations.
I really appreciate your insight!
CI
I use Dividend Investor web site to see at the current yield rate, 5 year growth, dividend history, and if the stock meets my criteria I look at technical analysis for entry points. I am not much a fan of valuating stocks. All I want is to find how sustainable the dividend is so my stream of income will be secured and then I am trying to buy dips (do not sell ribs at all). Keep it simple.
ReplyDeleteThat sounds like a reasonable way to do it. My method is to first identify solid companies that offer sustainable dividends which are expected to grow in the future. After I have the companies identified I try to research them to see if I like the business (numbers aren't everything). If I still like the company I will go about valuing the stock and then purchase it if it meets my buy price. I tend not to look at technicals, but it might be something I'll investigate in the future!
DeleteBut I am less concerned with the buy prices of certain stocks that I plan to hold forever. My KO purchase last month falls into that category. $36 for KO is a premium price but for something like Coca-Cola I'll overpay to a certain extent. For example I would not pay $40 for KO shares even though it's a forever stock. Valuations do change over time meaning I periodically have to crunch the numbers again.
DeleteI agree that valuation is difficult for KMI. I think a DDM can work reasonably well as long as you input conservative numbers.
ReplyDeleteRegarding Morningstar's fair value estimates, I discovered a while ago that they are listed at the top of the "Industry Peers" section under the "Overview" tab.
Oh wow! I was under the assumption that I needed to be a premium subscriber to access that information. Yes it says $38 for KMI. This is a great resource, morningstar is a fantastic site. Guess what I'll be doing this afternoon! haha
Delete