Enterprise Products Partners LP EPD is trading at a trailing 12-month EV/EBITDA multiple of 11.61x, which is lower than the broader industry average of 11.90x. Enbridge Inc. ENB and Kinder Morgan Inc. KMI, two other midstream majors, are valued higher at 16.83x and 14.93x, respectively.
Since EPD is undervalued, should investors jump into the stock immediately? Before deciding, it’s better to analyze EPD’s overall business environment, even though the partnership generates stable fee-based revenues like ENB and KMI.
EPD’s Inflation-Tied Contracts & Growth Capital Plans
Enterprise Products' pipeline network spans more than 50,000 miles, transporting oil, natural gas and other commodities. The partnership also has more than 300 million barrels of liquid storage capacity, generating stable cash flows. Importantly, EPD’s business model is inflation-protected because almost 90% of its long-term contracts include a provision for increasing fees when the business environment becomes inflationary. This is how the midstream energy player is able to safeguard its cash flow generation in all business scenarios.
EPD is also expected to generate incremental cash flow from its $4.8 billion in key capital projects, which are yet to come online.
EPD’s Robust Capital Return Strategy for Unit Holders
Due to the resilience of its business model, the partnership has been able to return capital to unitholders on an ongoing basis. Since its IPO, Enterprise Products has returned $62 billion to unitholders through both repurchases and distributions. EPD has increased distributions for 27 years consecutively. Thus, the partnership has become successful in keeping cash flow steady at all business cycles.
Is Now the Right Time to Invest in the Stock?
Following the positive developments, EPD has risen 20.2% over the past year, outperforming the industry’s 12.5%. Over the same time frame, Enbridge and Kinder Morgan have gained 20.1% and 16.5%, respectively.
Investors should note that despite EPD's strong focus on returning capital, the partnership’s current distribution yield of 5.88% is lower than the industry’s 6.13%. Also, EPD has a significant exposure to debt capital compared to the composite stocks belonging to the energy sector.
Thus, despite being undervalued and with all the positive developments in place, it is wise not to bet on EPD right away. But those who have already invested can retain the stock, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Beyond Nvidia: AI's Second Wave Is Here
The AI revolution has already minted millionaires. But the stocks everyone knows about aren't likely to keep delivering the biggest profits. Little-known AI firms tackling the world's biggest problems may be more lucrative in the coming months and years.
SeeWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Enterprise Products Partners L.P. (EPD): Free Stock Analysis Report
Enbridge Inc (ENB): Free Stock Analysis Report
Kinder Morgan, Inc. (KMI): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).