It's Time For a Deep Dive Into Equitrans Midstream

Standing out among the Street's worst performers today is Equitrans Midstream, an oil & gas transportation company whose shares slumped -3.0% to a price of $7.58, after WV Senator Joe Manchin withdrew his support for its pipeline project. The company's shares are now trading 21.88% below their average analyst target price of $9.7. The average analyst rating for the stock is hold. ETRN lagged the S&P 500 index by -4.5% so far today and by -8.2% over the last year, returning -24.5%.

Equitrans Midstream Corporation owns, operates, acquires, and develops natural gas gathering, transmission and storage, and water services assets in the Appalachian Basin. The company is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.

Equitrans midstream does not release its trailing 12 month P/E ratio since its earnings per share of $-3.26 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for ETRN of -2.3. Based on the company's positive earnings guidance of $0.62, the stock has a forward P/E ratio of 12.2.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the energy sector has an average P/E ratio of 9.11, and the average for the S&P 500 is 15.97.

The problem with P/E ratios is that they don't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations. We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.81 Price to Earnings Growth (PEG) ratio. In ETRN's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Equitrans Midstream's gross profit margin trends:

  • 2021 gross margins: 88.4 %
  • 2020 gross margins: 89.8 %
  • 2019 gross margins: 89.9 %
  • 2018 gross margins: 89.1 %
  • Average gross margin: 89.3 %
  • Average gross margin growth rate: -0.3 %
  • Coefficient of variability (lower numbers indicating more stability): 0.8 %

Such strong margins are common in the energy industry. Equitrans's stable gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Equitrans Midstream was $878,247,000.00 as of its last annual report. Over the four preceding years, cash flows have been very irregular, which would be worrisome if not for their incredible average growth rate of 2493.6%.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Equitrans's P/B ratio is 2.1 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.45 as of the second quarter of 2022.

Despite its generally upwards trend of positive cash flows, Equitrans Midstream is likely overvalued at today's prices because it has a negative P/E ratio and an average P/B ratio. However, the company has strong growth indicators because of its strong and stable gross margins and a PEG ratio of less than 1. We hope you enjoyed this overview of ETRN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.