Energy Transfer: Solid Q3 Earnings Fail to Lift Its Stock

Energy Transfer (ET) stock has stayed weak and fell below $12 yesterday. Once again, the company’s strong earnings results, released November 6, didn’t boost the stock. It has fallen more than 10% this year and is trading close to its 11-month low.

Although the midstream giant missed analysts’ average revenue and earnings estimates, it did fairly well in the third quarter. Energy Transfer’s distributable cash flow grew 10% YoY (year-over-year) to $1.52 billion, and its distribution coverage ratio was 1.88x. A higher distribution coverage ratio generally represents stable future distribution.

Energy Transfer currently offers a distribution yield close to 10%, much higher than many of its peers’ yields. However, for the last several quarters, its distribution hasn’t changed. An increase would please Energy Transfer investors. Peers Kinder Morgan (KMI) and Williams Companies (WMB) offer distribution yields of 7% and 5%, respectively.

Energy Transfer’s Q3 earnings

In the third quarter, the company’s adjusted EBITDA rose just 7% YoY to $2.61 billion, despite growth projects coming online. That growth slowed from the 50% EBITDA growth seen in the last four quarters, which could concern investors.

What’s next for ET stock?

Energy Transfer stock is currently trading 7% and 16% below its 50- and 200-day simple moving averages, respectively, indicating weakness. The stock broke below those levels in early August. Its 50-day average around $12.94 could act as short-term resistance. With a relative strength index score of 31, the stock appears to be approaching “oversold” territory.

Energy Transfer’s valuation

Energy Transfer stock’s valuation is still attractive. Its forward EV-to-EBITDA multiple of 8x is much lower than its five-year EV-to-EBITDA multiple of around 15x. It’s also lower than Kinder Morgan’s and Williams Companies’ multiples of 12x and 10x, respectively.

Analysts expect Energy Transfer’s earnings to grow 36% YoY in 2019 and 3% YoY in 2020. Their mean target price of $20.79 for ET stock implies a significant upside of almost 74% against its current price of $11.97.

Meanwhile, analysts’ mean target of $28.41 for Williams Companies stock implies a 29% upside from its current price of $22.08. Wells Fargo cut its target price from $29 to $26 last week.

Kinder Morgan stock offers a potential 11% upside based on analysts’ mean target of $22.15. It closed at $19.94 yesterday. To learn more, read Top Midstream Energy Stocks: What Analysts Got Wrong.