Energy Transfer Stock Is Oversold and Undervalued

  • Energy Transfer stock has been under pressure due to a weak earnings season from the MLP energy sector. 
  • ET’s fundamentals remain stronger than ever, attracting risk-happy investors. 
  • Energy Transfer has a solid percentage of institutional ownership, providing a lot of confidence for individual investors.
  • Options markets have a 12% move in December priced in.

Shares of Energy Transfer (ET) have declined 7% over the past week. However, stocks may move out of favor in the market. That’s exactly our case, as ET has tracked the ALPS Alerian MLP ETF (AMLP) significantly over the past week.

Its correlation coefficient of 0.885 confirms that ET’s recent stock price drop was caused by a sell-off in the MLP energy sector. So, let’s consider the company’s valuation metrics, recent institutional transactions, and perform options market analysis to see whether Energy Transfer’s stock represents an attractive risk-reward ratio at the current levels. 

Why valuation is appealing for Energy Transfer stock

Energy Transfer stock is trading at 8.29x its fiscal 2019 earnings estimates of $1.41. With that, Energy Transfer looks undervalued compared to the sector’s median forward PE ratio of 12.05. If the company begins to trade closer to the sector’s median levels, the stock price could be around $16.99, which represents a gain of 45.57% from the current levels. 

Moreover, ET is undervalued compared to the MLP energy sector based on many multiples. The stock’s TTM multiples compared to its sector’s median are as follows:

  • 8.02x versus 11.13x non-GAAP price-to-earnings
  • 3.75x versus 4.14x price-to-cash-flow
  • 12.04x versus 12.90x EV-to-EBIT
  • 0.55x versus 0.91x P/S

In addition, Energy Transfer stock is trading with a forward PEG (price-to-earnings-growth) ratio of 1.38x. This figure suggests that the stock is slightly undervalued, given a PEG ratio of 1–1.5 for a fairly valued stock. 

Ownership and analyst coverage 

Institutional ownership is approximately 55.4% of diluted shares. Most of this comes from Harvest Fund Advisors LLC, which owns around 110.55 million shares or 4.21%. Next are Tortoise Capital Advisors LLC, Goldman Sachs & Co. LLC, and Invesco Advisers, with ownership of about 3.51%, 2.91%, and 2.36%, respectively.

According to CNN Business, approximately 12.9 million shares were bought by institutions, and 10.75 million shares were sold during the past quarter. 

Options traders are extremely bullish on Energy Transfer stock

The implied volatility for the ET options, at a $12.00 strike price that expires on December 25, stands at 12.50%. This number means that investors expect an event that could cause moderate movement in one direction or the other. In comparison, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility stands at 1.56% for the same expiration date. 

In addition, traders from the options market also see some opportunity on ET stock. They expect the stock to rise at least 12% in the coming weeks. Moreover, the calls at the $13.00 strike price outweigh the put options by about 121 to 1.

We can see 27,391 open calls to 226 open puts. Also, the calls at the $14.00 strike price outweigh the put options about 14 to 1 with 642 open calls to just 45 open puts.

For a buyer of $14.00 calls to earn a profit, the stock would need to rise to around $14.05 by the expiration date. This suggests a gain of about 20.49% from its last closing price of $11.66.

Analysts’ coverage and target price for ET stock

Wall Street analysts have upgraded ET over the last six months. For Energy Transfer stock, the consensus price target stands at $20.11, which represents a 72.48% upside. Please see MarketBeat for a detailed breakdown.

According to TipRanks, ET is a “strong buy” with an average price target of $21.60, representing an 85.25% upside. All five analysts covering ET recommended it as a “buy.” 

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