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Genesis Energy Is Trading at a Discount despite Strong Earnings

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Apr. 20 2018, Updated 7:33 a.m. ET

Earnings growth

So far in this series, we’ve looked at the earnings growth expectations for six midstream companies, including Noble Midstream Partners (NBLX), MPLX (MPLX), Phillips 66 Partners (PSXP), Antero Midstream Partners (AM), Andeavor Logistics (ANDX), and Energy Transfer Partners (ETP). In this part, we’ll look at the earnings expectations for Genesis Energy (GEL). GEL

Genesis Energy is expected to post 27.4% YoY (year-over-year) EBITDA (earnings before interest, tax, depreciation, and amortization) growth in the first quarter of 2018 compared to the same quarter in the previous year. Growth is expected to be primarily driven by its acquisition of the alkali business in 2018. That could be offset by a decline in its offshore pipeline transportation and marine transportation businesses. For 2018, analysts expect Genesis Energy to post 18.7% YoY EBITDA growth. Its annual EBITDA growth is expected to be 4.8% during the 2018–2019 period.

Genesis Energy’s strong EBITDA growth in 2018 isn’t expected to translate to strong distribution growth considering its high leverage, the weak operating performance of its Legacy businesses, and dilution from the acquisition of the alkali business.

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Valuations

Genesis Energy was trading at a forward EV[1. enterprise value]-to-EBITDA multiple of 10.0x as of April 12, 2018. That’s below the three-year and one-year averages of 11.9x and 10.5x. Its current distribution yield of 9.8% is higher than the five-year average of 6.6%. Its current valuation might indicate a buying opportunity. On the other hand, its valuation could reflect its high leverage, high commodity price exposure, and a decline in throughput volume across a few of its segments.

Analyst recommendations

About 50% of the analysts covering Genesis Energy stock are rating it a “buy” as of April 12, 2018, and the remaining 50% are rating it a “hold.” It hasn’t had any rating updates since the start of this year. GEL is currently trading below the low range ($24) of analysts’ target prices. Its average target price of $27 implies a 22% upside potential from its current price.

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