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Analyzing Kinder Morgan’s Discounted Valuation

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Forward EV-to-EBITDA multiples

All of the four companies—Enterprise Products Partners (EPD), Kinder Morgan (KMI), Williams Companies (WMB), and MPLX (MPLX)—are trading at lower forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples than their respective five-year average multiples. Kinder Morgan’s forward EV-to-EBITDA multiple is the lowest among the four peers.

The above graph compares the forward EV-to-EBITDA multiples for the four midstream companies that we’re discussing in this series.

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As the graph shows, Enterprise Products Partners’ multiple has historically remained higher compared to its peers. The higher multiple is likely due to Enterprise Products Partners’ superior risk-return metrics. Reuters analysts expect Enterprise Products Partners’ revenues to grow 23.9% in 2018 and 9.8% in 2019. The company’s EBITDA is expected to grow 20.4% in 2018 and 3.8% in 2019.

Kinder Morgan’s growth expectations

Kinder Morgan’s multiple is 27% lower than its five-year average. Kinder Morgan’s lower multiple could be due to analysts’ lower growth expectations for the company. Analysts expect Kinder Morgan’s revenues to grow ~3.9% in 2018 and 4.5% in 2019. The company’s EBITDA is expected to increase 4.7% in 2018 and 1.7% in 2019.

The EV-to-EBITDA multiple is an important metric used in valuation. A company’s enterprise value is roughly the market value of its debt and equity, less its cash holdings. So, the EV-to-EBITDA ratio is capital structure neutral. The multiple takes a company’s debt and equity into account.

Next, we’ll discuss the four companies’ historical EBITDA growth.

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