1. Stock Recommendation for Enterprise Products Partners, L.P. (EPD; NYSE) by Brandon Balagna-Toal
Enterprise Products Partners,L.P.’s current (ttm) P/E multipleof 22.5 is most definitely
unjustified atthe current levels of $63.24/sharewith (ttm) earnings of $2.81/sharefor the simplefact that
although EPD has had a great run as of late and been a good performer, its days of growth are behind
them, as the forward P/E 20.73, based on the average consensus forecastestimate (FYE 2014) earnings of
$3.05/shareatcurrent levels,especially when you consider that the sector avg. P/E is at14.7 and the S&P
avg. P/E is at15.5. Looking at the PEG Ratio of 3.63, this implies a growth rate of 17.5%, but in reality,
when you look atgoing from $2.92/share(2013 FY est.) to $3.05/share(2014 FY est.), this implies an
earnings growth rate (YOY) of only 4.5%, which is quitea largedisconnect,with the mean estimate for the
current pricetarget of only $66.31, there is less than 5% upsidefrom current levels. Now based on
current year YOY (2013 vs.2012) numbers of a 7.7% earnings growth rate and a (ttm) P/E of 21.8,
compared to the industry growth rate of 3.4% with a P/E of 14, the sector growth rate of 4.8% with a P/E
of 14.7 and the S&P growth rate of 8.2% with a P/E of 15.6, there again seems to be quite a disconnectof
EPD’s P/E vs.that of the S&P (21.8 vs. 15.6), with slightly lower growth (7.7% vs. 8.2%). So with a lower
than expected YOY (2014 vs.2013) earnings growth rate of only 4.5%, when the industry avg. is at11.9%
with a 14 P/E multipleof 14 and the S&P avg. growth rate of 13.6% with a P/E multi pleof 15.6, things
seem to be deteriorating for EPD vs. the industry,sector and S&P this year vs. next year, which is really
what Analysts need to be focused on, as we discountthe future – not the current or past growth of a
company and lookingat what we’re expecting next year, there is littleroomfor growth over current
levels,which would indicatethat this stock has had its run, being atalmostits 52-week high of $65.60 and
havingtopped out there and come off a bit, itappears that this stock’s better days arebehind it– not in
front of it. The growth trend for EPD is clearly deceleratingata rapid pace. So normally,I would think
that this would justify a SELL rating,however, with almostthe entire street (20 of the 23 Analysts that
cover the stock) being at either a BUY or STRONG BUY (with only 3 HOLDS), you have to ask yourself why
the disconnectbetween priceand growth? The answer is simpleand obvious:the street is chasingyield
and there are not that many places to put your money to work if you’re on the buy-side,so stocks like
EPD represent one of the only options availableto them in the current marketplace to get a better yield
than other opportunities provide. So the street is willingto overpay for this relatively better yield
instrument, even though itis wildly overvalued by ANY metric, includingP/Eof 21.8 vs.15.6 (EPD vs.S&P),
Price-to-Book of 4.15 (with anythingover 2 usually beingovervalued),a PEG Ratio of 3.63 (with anything
over 2 usually beingovervalued), an EV/EBITDA of 16.9 (when anythingover 7 or 8 is usually overvalued –
in this case,by a factor of 2+), EPD looks expensive, relativeto the industry,sector and S&P averages. So
although EPD has a history of beatingthe street’s estimates, based on current expectations and where the
stock is tradingand where it’s target priceis,there arenot likely any upsidesurprises in EPD’s future and
were it not for the current market phenomenon of chasingyield and EPD being one of the relatively
better options in that environment, this stock would be dead money for the foreseeable future.
So based on the above-mentioned data, my Bull thesis for EPD is:
The above-mentioned market-chasing-yield phenomenon;
The 50-day moving avg. has crossed above the 200-day moving average (a bullish technical indicator);
and
EPD’s history of upsidesurprisesin beatingstreet estimates (although I’m really stretchinghere to
come up with a third bull thesis).
Likewise, based on the above-mentioned data, my Bear thesis for EPD is:
The stock has hitits 52-week high and come off;
The expected growth rates as mentioned above aredecelerating rapidly for EPD vs. the industry,
sector and S&P averages; and
The stock is wildly overvalued at current levels and I recommend a HOLD, based on the fact that if
you do own it, itis a good placeto put your money if you’re chasingyield,butI wouldn’t add to or
initiatea position here.