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.
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.