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 LP (NYSE:KMP) fits the bill.
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 — while understanding that the master limited partnership structure introduces some wrinkles in using these factors to evaluate an MLP — 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% | (1.3%) | Fail |
| 1-year revenue growth > 12% | 5.2% | Fail | |
| Margins | Gross margin > 35% | 47.7% | Pass |
| Net margin > 15% | 15.5% | Pass | |
| Balance sheet | Debt to equity < 50% | 149.7% | Fail |
| Current ratio > 1.3 | 0.70 | Fail | |
| Opportunities | Return on equity > 15% | 21.1% | Pass |
| Valuation | Normalized P/E < 20 | 24.39 | Fail |
| Dividends | Current yield > 2% | 5.8% | Pass |
| 5-year dividend growth > 10% | 7.4% | 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 company has kept its four-point score for the third year in a row. The units have been flat as well, leaving investors to rely on the MLP’s generous distributions as their sole return on their investment over the past year.
Kinder Morgan has set ambitious goals for 2013. With goals of increasing earnings by more than 20%, Kinder Morgan will need new projects like terminal projects in Houston and Edmonton to get online quickly, and new pipelines in the Marcellus and other shale plays should take advantage of strong production levels from unconventional plays around the country. In addition, with the MLP getting more assets from general partner Kinder Morgan Inc (NYSE:KMI) in connection with the buyout of El Paso, Kinder Morgan Energy Partners should see greater cash flow that should help it meet its goal of distributing $2 billion to unitholders in 2013.
One way Kinder Morgan has tried to grow is by buying out other midstream companies, having gone on somewhat of an acquisition binge in recent years. After the massive El Paso acquisition, the MLP said late last month that it would buy Copano Energy, L.L.C. (NASDAQ:CPNO) for about $5 billion. The buyout will add another 6,900 miles to Kinder Morgan’s extensive pipeline network, as well as processing plants in Texas, Oklahoma, and Wyoming — all strategically important locations for Kinder Morgan to serve budding shale plays, especially the Eagle Ford.
Kinder Morgan also took steps to streamline its operations. By selling its one-third interest in the Express-Platte crude-oil pipeline to Spectra Energy Corp. (NYSE:SE) , the MLP got valuable cash for more productive assets.
For Kinder Morgan to improve, it needs to keep executing on its pipeline and CO2 businesses while increasing its refined products segment. If it can do so, then revenue growth is the best vehicle to get Kinder Morgan Energy Partners closer to perfection.
The article Has Kinder Morgan Energy Partners Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan and Spectra Energy. The Motley Fool owns shares of Kinder Morgan.
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