One of Wall Street's biggest winners of the day is Kinder Morgan, a oil & gas transportation and processing company whose shares have climbed 4.1% to a price of $24.7 -- 8.1% above its average analyst target price of $22.85.
The average analyst rating for the stock is buy. KMI outperformed the S&P 500 index by 3.0% during today's afternoon session, and by 10.0% over the last year with a return of 42.9%.
Kinder Morgan, Inc. operates as an energy infrastructure company primarily in North America. The company is a utility stock. Historically, the utilities sector has proven to be a safe haven during economic downturns, as they provide an essential service that is always in demand. Investors also tend to choose these stocks because they generally pay attractive dividends. But there is no telling if this will continue in the future.
Utilities tend to have high debt levels because of the enormous capital requirements of maintaining their infrastructure. In periods of rising interest rates, a high debt load can prove disastrous for a company. Another source of uncertainty facing the sector is the imminent rollout of new Federal clean power regulations which will increase costs for utilities, but also provide subsidies for the sector — at least initially.
Kinder Morgan's trailing 12 month P/E ratio is 22.7, based on its trailing EPS of $1.09. The company has a forward P/E ratio of 19.6 according to its forward EPS of $1.26 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US utilities companies is 20.52, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
KMI’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Kinder Morgan, we obtain a PEG ratio of 2.57, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Kinder Morgan's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 6,491,000 | 2,317,000 | 4,174,000 | 24.75 |
| 2022 | 4,967,000 | 1,621,000 | 3,346,000 | -24.42 |
| 2021 | 5,708,000 | 1,281,000 | 4,427,000 | 55.72 |
| 2020 | 4,550,000 | 1,707,000 | 2,843,000 | 14.73 |
| 2019 | 4,748,000 | 2,270,000 | 2,478,000 | 15.85 |
| 2018 | 5,043,000 | 2,904,000 | 2,139,000 |
- Average free cash flow: $3.23 Billion
- Average free cash flown growth rate: 12.6 %
- Coefficient of variability (the lower the better): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in KMI have received an annualized dividend yield of 4.8% on their capital.
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.
Kinder Morgan has a P/B ratio of 1.81. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Utilities sector, which stood at 2.2 as of the third quarter of 2024.
Kinder Morgan is by most measures undervalued because it has an average P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and strong operating margins with a stable trend. We hope you enjoyed this overview of KMI's fundamentals.
