uploads/2017/03/is-kmi-undervalued-1.jpg

Is Kinder Morgan Attractively Valued?

By

Updated

Discount compared to historical valuation

Kinder Morgan (KMI) is currently trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of nearly 12x, which is lower than its five-year average multiple of ~18x.

The enterprise value of a company is roughly the market value of its debt and equity, minus its cash holdings. The EV-to-EBITDA ratio is neutral to the capital structure as it takes into account a company’s debt and equity, and a lower ratio may indicate a possible undervaluation.

Article continues below advertisement

Discount relative to peers

Kinder Morgan’s forward EV-to-EBITDA ratio is also lower than Enterprise Products Partners’ (EPD) ratio of 14x and Plains All American Pipeline’s (PAA) ratio of 14x. KMI’s ratio is, however, comparable to ONEOK’s (OKE) multiple.

The above graph compares KMI’s forward EV-to-EBITDA multiple with select peers. As you can see, KMI appears to be trading at a discount to its own historical valuation as well as to peers.

KMI’s yield

Notably, Kinder Morgan’s yield of 2.2% is lower than Enterprise Products Partners’ (EPD) yield of 5.7%, Magellan Midstream Partners’ (MMP) yield of 4.3%, and Energy Transfer Equity’s (ETE) yield of 6%. The SPDR S&P 500 ETF (SPY) (SPX-INDEX) currently yields nearly 2%.

In the next and final part of this series, we’ll take a look at what Wall Street analysts are recommending for KMI.

Advertisement

More From Market Realist