Today we're going to take a closer look at large-cap Energy company Enterprise Products Partners, whose shares are currently trading at $24.04. We've been asking ourselves whether the company is under or over valued at today's prices... let's find out!
Enterprise Products Partners L.P. provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. The company belongs to the Energy sector, which has an average price to earnings (P/E) ratio of 9.11 and an average price to book (P/B) ratio of 1.45. In contrast, Enterprise Products Partners has a trailing 12 month P/E ratio of 10.4 and a P/B ratio of 2.0.
P/B ratios are calculated by dividing the company's market value by its book value. The book value refers to all of the company's tangible assets minus its liabilities -- meaning that intangibles such as intellectual property, brand name, and good will are not taken into account. Traditionally, a P/B ratio of around 1 shows that a company is fairly valued, but owing to consistently higher valuations in the modern era, investors generally compare against sector averages.
P/E ratios have their limits on their usefulness too. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
Enterprise Products Partners's PEG ratio is 1.11, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.