Enterprise Products Partners Stock: Increasing Capex, Big FCF, Undervalued (NYSE:EPD)

MLP stocks had enjoyed strong relative strength against the broad market from late 2020 through much of Q4 of last year. The value trade was in full steam, and investors flocked to firms generating reliable free cash flow. But with a pronounced shift to mega-cap growth this year, many high-yield MLPs have simply tread water. The good news is that investors have been paid to wait.

I have a buy rating on Enterprise Products Partners (NYSE:EPD). I see it at the very low end of its historical earnings multiple range and its free cash flow yield has remained robust amid an ongoing stock price trend consolidation.

MLP Stocks Have Turned Lower Versus the S&P 500 Amid The Growth Stock Frenzy in 2023

According to Bank of America Global Research, EPD, one of the largest publicly traded MLPs, provides a wide variety of midstream energy services, including gathering, processing, transportation, and storage of natural gas, natural gas liquids (NGL) fractionation, import and export terminalling and offshore production platform services. EPD has four reportable business segments: Natural Gas Pipelines and Services, NGL Pipelines and Services, Petrochemical (petchem) Services, and Crude Oil Pipelines and Services.

The Houston-based Oil and Gas Storage and Transportation industry company within the Energy sector trades at a low 10.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 7.4% forward yield, according to Seeking Alpha. Ahead of earnings in August, the stock has a low 14% implied volatility percentage.

Back in May, EPD reported solid adjusted EBITDA results. Q1 GAAP per-share profits were $0.63, beating the Wall Street consensus by a penny, though revenue of $12.44 billion was lower by 4.3% on a year-on-year basis (and missed estimates). Still, the stock found support in the days after the report. With adjusted free cash flow of nearly $6 billion in the preceding 12 months, there is plenty of liquidity for shareholder accretive activities.

The first-quarter beat was largely driven by results from its petchem segment. Total adjusted gross operating income from that area verified at $419 million, up 21% versus consensus estimates. The management team increased its growth capex guidance for 2023 and in the out year from $2.3 to $2.5 billion to $2.4 to $2.8 billion.

With a strong position in the wellhead-to-water midstream space and robust petchem performance lately, the firm is operating well. Its balance sheet is also in good shape with high free cash flow allowing the company to make significant investments. Just recently, the company announced that it completed an expansion into the Acadian Haynesville region. Key risks include lower oil & gas prices and volumes and somewhat concentrated customer exposure.

On valuation, analysts at BofA see earnings rising at a modest pace this year before accelerating in the out-year. The Bloomberg consensus forecast is slightly less sanguine compared to BofA’s outlook. Still, dividends are expected to rise at a steady rate over the coming quarters, eventually surpassing $2.

EPD also looks attractive when assessing its P/E multiples, along with the high distribution yield. With an EV/EBITDA ratio that is about one-third of the broad market’s, there’s further evidence that EPD is on the cheap side. Lastly, like many Energy sector firms today, the free cash flow yield and profitability are very impressive.

EPD: Earnings, Valuation, Dividend, Free Cash Flow Forecasts

Enterprise Products trades near the sector-median multiple and close to its 5-year average today. So, it is not a screaming buy. However, if we stretch out the P/E (forward, operating) ratio chart out further, we see that the last few years have been a period of exceptionally low valuations for the firm, yet it continues to produce profits and cash flow.

I assert that a fairer earnings multiple is closer to 13 – that would still be far under the range from 2010 through 2017. Assuming $2.65 of next-12-month EPS and applying a 14 P/E, the stock has a target of $34.45, making it a buy on valuation.

EPD: Valuation Metrics Are Solid Given EPS Growth And Longer-Term Comparisons

EPD: Very Cheap Valuation Multiple Vs History

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, August 3 BMO. No other volatility catalysts are seen on the calendar, and the projected Q3 reporting date is October 31.

Corporate Event Risk Calendar

The Technical Take

While I very much like the valuation, the technical trend is not impressive. Notice in the chart below that shares have largely traded sideways since notching a high in June of 2022 during the massive run-up in domestic and global energy commodity prices. What’s encouraging, however, is that support near $23 has held firm – that was also the breakout point from a downtrend throughout much of the latter half of 2022.

With ample volume by price in the $23 to $26 range, there’s strong cushion if we see lower prices in Q3. In the near term, I would like to see EPD rise above resistance in the $27 to $28 range and ultimately climb higher than the $29 mark from last year. With a flat 200-day moving average, the consolidation off that peak is still ongoing, so it is a neutral to slightly bullish chart in my view.

EPD: Trading Range Off the 2022 High, Key Support Near $23

The Bottom Line

I have a buy rating on EPD. I see the valuation as quite low today, given the company’s massive free cash flow and low valuation. I would like to see better momentum ensue, but the valuation case outweighs the neutral chart to me right now.