Is Kinder Morgan Stock a Good Oil Pipeline Investment?
As an investor, it’s hard to ignore the effects of the oil glut. The whole energy industry has been in disarray for the last couple years. And the price of oil has dragged whole national economies down with it. Just ask a Russian or Venezuelan.
Under these circumstances, it might seem smart to assume that any oil-related investment is a no-go. But that would cause you to miss out on one still-lucrative segment of the energy business: oil pipelines.
Transporters, as they are more commonly known, are paid by oil volume and transportation distance. They don’t actually buy or sell the oil itself. So they’re not directly affected by its price.
The largest oil pipeline company in the U.S. is Kinder Morgan (NYSE: KMI). Since its IPO in 2011, Kinder Morgan stock has seen a lot of healthy growth. They’ve also paid a reliable dividend.
Kinder Morgan stock might not be directly affected by the oil glut. But the firm’s clients are oil extractors. This begs the question: Could Kinder Morgan’s business be indirectly affected by falling revenues among its business partners?
Today, there is a climate of uncertainty in the energy space. And Investment U readers want to know... Is Kinder Morgan stock a good buy?
To find out, we ran the oil pipeline company through the Investment U Fundamental Factor Test. (As a reminder, our checklist looks at six key metrics to diagnose the financial health of a stock.)
Earnings-per-Share (EPS) Growth: Oil pipelines have seen falling revenue as an indirect result of the energy glut. The average earnings growth in the industry isn’t great - it’s -11.60%. However, Kinder Morgan is doing considerably worse. Its growth rate is just -135.60%.
Price-to-Earnings (P/E): One encouraging sign for Kinder Morgan stock is its price-to-earnings ratio. Most oil pipeline stocks trade at 50.41 times earnings. But Kinder Morgan trades at just 28.91 times earnings. This implies the stock has room for growth.
Debt-to-Equity : Unfortunately, Kinder Morgan is considerably more leveraged than other pipeline companies. That’s a bad sign. The average debt-to-equity ratio in the industry is 78.41%. Kinder Morgan has a much higher debt burden at 113.40%.
Free Cash Flow per Share Growth : Despite some troubles with revenue, oil pipelines generally enjoy healthy cash flows. The industry average for free cash flow per share growth is an impressive 38.84%. Kinder Morgan’s growth rate of 12% would be respectable on its own. But it’s considerably lower than its peers.
Profit Margins : Oil pipelines have been operating on thin margins as of late. The average profit margin among these companies is a meager 1.76%. Kinder Morgan is doing even worse, with a negative margin of -5.65%.
Return on Equity : Kinder Morgan finishes somewhat strong here. Its performance isn’t as bad as most of its competition’s. The stock has an annual ROE of just -0.74% - compared to the -4.50% average in the industry.
As a whole, Kinder Morgan stock’s fundamentals are weaker than one might expect. Its strong performance and reliable dividend make the company look much healthier than it really is.
Compared to its competitors, the oil pipeline has a low valuation and a less disappointing return on equity. Those are both important metrics. And Kinder Morgan stock’s strength in this areas is not to be discounted.
But the rest of our metrics, like earnings, debt burden, cash flow and profit margin paint a bleaker picture of the oil pipeline. Kinder Morgan shareholders shouldn’t necessarily sell today. But they should keep in mind that the company is not immune from the problems plaguing the energy sector.
For these reasons, Kinder Morgan stock has earned a grade of D.
Fundamental Factor Test Score
D: Hold With Caution (Meets only two key metrics)
Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.
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