Kinder Morgan Inc (NYSE:KMI) released its second quarter earnings after the closing bell Wednesday, and as had been expected by several analysts, the company didn’t put up a spectacular performance during the quarter, posting earnings per share of $0.15 on revenue of $3.46 billion. This was below analysts’ earnings per share consensus estimate of $0.19, and well below their revenue estimates of $3.96 billion. The company’s cash flow was however stronger, prompting it to up its quarterly dividend to $0.49. On a year-over-year basis, the company delivered an improvement of $0.18 on distributed cash flow, to $0.50. According to the results, the company had $1.10 billion in distributable cash flow before items, which was way above the $332 million it posted in the same quarter last year. Net income too was down, to $342 million compared to $497 million in the same quarter last year. Reasons for the decline as cited by the company’s management were increased Depreciation, Depletion and Amortization (DD&A) expenses, box taxes, and interest expenses. Generally, some other factors that contributed to the miss were low prices of the company’s products, and low sales volume. The company’s revenue stems from four principal segments, namely, natural gas pipelines, terminals, products pipelines, and CO2. Being in the energy industry, which has been widely hit by low gas prices, the Houston, Texas-based company too became a victim, accounting for its low revenue.
A total of 66 of the hedge funds tracked by Insider Monkey were long in this stock as of March 31, a drop of five from one quarter earlier. The aggregate value of the holdings of the funds also decreased considerably, to $1.59 billion from $2.07 billion over the course of the first quarter. With Kinder Morgan’s shares being down only slightly (less than 1%) during that time, the decrease is mostly attributable to a withdrawal of capital by the smart money. They have proven to be wise in doing so, as shares have dipped by 10% since the end of that period, as well as the disappointing earnings. We can say that the smart money definitely saw it coming based on their moves.
As we consider a company’s performance, we also look into the activities of hedge funds on the stock. But why do we track hedge fund activities? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 81 percentage points over the 34 month period beginning in September 2012, returning nearly 140% (read the details here).
Insider activity is another important metric that we track (and from which we derive our name), and we find a number of these transactions have taken place at Kinder Morgan this year. Executive Chairman Richard Kinder has purchased 300,000 shares this year, hiking his sizable ownership to over 234 million shares. President and CEO Steven Kean has also purchased 12,000 shares this year. While there have also been a number of insider sales, given that insider purchases are a much more powerful indicator, we consider the insider activity to be bullish.
Let’s move on to a deeper look at the hedge fund activity in the stock.
How have hedgies been trading Kinder Morgan Inc (NYSE:KMI)?
According to hedge fund experts at Insider Monkey, FPR Partners, managed by Bob Peck and Andy Raab, holds the most valuable position in Kinder Morgan Inc. FPR Partners has a $228.3 million position in the stock, comprising 5.9% of its 13F portfolio. Peck and Raab also have a large $174.1 million position of call options on the stock; a further 4.5% of their 13F portfolio is allocated to that holding. Other peers with similar optimism contain Leon Cooperman’s Omega Advisors, Jody LaNasa and Vivian Lau’s Serengeti Asset Management, and Glenn Greenberg’s Brave Warrior Capital.
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Due to the fact that Kinder Morgan Inc (NYSE:KMI) has faced bearish sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedgies that slashed their positions entirely in the first quarter. It’s worth mentioning that Eric W. Mandelblatt‘s Soroban Capital Partners said goodbye to the biggest investment of the 700 funds followed by Insider Monkey, totaling an estimated $306.7 million in stock. Bain Capital’s fund, Brookside Capital, also dropped its stock, about $175.1 million worth. These moves are important to note, as aggregate hedge fund interest dropped by five funds in the first quarter.
In Thursday trading, Kinder Morgan is down by 0.48%. Looking at the company’s performance in the second quarter and considering its projections for both earnings and dividends for the year, it’s likely that more investors might consider it a buy. Analysts at Zacks have upgraded the stock to a “Hold” from a “Sell”, in a report note issued on Wednesday ahead of the company’s earnings results. We have to agree at this point that we can’t recommend a buy, but would refrain from selling also.
Disclosure: None
