Has Kinder Morgan Energy Partners Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Kinder Morgan Energy Partners (NYS: KMP) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Kinder Morgan Energy Partners.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-Year Annual Revenue Growth > 15% | (1.9%) | Fail |
1-Year Revenue Growth > 12% | 1.7% | Fail | |
Margins | Gross Margin > 35% | 39.8% | Pass |
Net Margin > 15% | 15.3% | Pass | |
Balance Sheet | Debt to Equity < 50% | 182.5% | Fail |
Current Ratio > 1.3 | 0.44 | Fail | |
Opportunities | Return on Equity > 15% | 17% | Pass |
Valuation | Normalized P/E < 20 | 30.05 | Fail |
Dividends | Current Yield > 2% | 5.8% | Pass |
5-Year Dividend Growth > 10% | 7.2% | Fail | |
Total Score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kinder Morgan Energy Partners last year, the master limited partnership has kept its four-point score. But a lot has happened to the company that has big implications for the future.
Kinder Morgan Energy Partners is part of a somewhat complicated corporate structure, representing the limited partnership interests of the MLP. Meanwhile, Kinder Morgan (NYS: KMI) acts as the general partner of the MLP.
The big news for Kinder Morgan over the past year is its buyout offer for El Paso. Kinder Morgan has said that it wants to get rid of El Paso's exploration and production business, focusing instead on the midstream pipeline and other assets held inside its El Paso Pipeline Partners (NYS: EPB) MLP. With the E&P unit including exposure to the Eagle Ford and Haynesville shale plays, as well as other locations around the world, Kinder Morgan should get some interest despite low natural gas prices. Chesapeake Energy (NYS: CHK) or EOG Resources (NYS: EOG) could make potential buyers, given their current presence in the Eagle Ford and their relatively large size compared to their competitors.
In addition, though, Kinder Morgan has some big projects going on. By building a processing facility on the Houston Ship Channel, the company should be able to profit from Eagle Ford production. Similarly, in Alberta, Kinder Morgan is adding new storage tanks to its Edmonton terminal to take advantage of higher oil sands production.
Reaching perfection will be a tough move for Kinder Morgan Energy Partners, given extensive debt that is likely to get even larger after an acquisition. But as long as gas production continues, companies will need to move it, and Kinder Morgan is in a good position to do that in the future.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
If you like energy stocks, we've got another company that really deserves your attention. Read about it right here in the Motley Fool's special free report on the energy industry and its best prospects -- it's free, but only available for a limited time.
Click hereto add Kinder Morgan Energy Partners to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of El Paso Pipeline Partners and Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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