The stock of Energy Transfer LP (NYSE:ET, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $10.78 per share and the market cap of $29.1 billion, Energy Transfer LP stock appears to be significantly overvalued. GF Value for Energy Transfer LP is shown in the chart below.
Because Energy Transfer LP is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Energy Transfer LP has a cash-to-debt ratio of 0.01, which ranks in the bottom 10% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Energy Transfer LP’s financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Energy Transfer LP over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Energy Transfer LP has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $44.3 billion and earnings of $1.24 a share. Its operating margin is 19.28%, which ranks better than 83% of the companies in Oil & Gas industry. Overall, the profitability of Energy Transfer LP is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Energy Transfer LP over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Energy Transfer LP’s 3-year average revenue growth rate is worse than 84% of the companies in Oil & Gas industry. Energy Transfer LP’s 3-year average EBITDA growth rate is -19.3%, which ranks worse than 72% of the companies in Oil & Gas industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Energy Transfer LP’s ROIC was 8.99, while its WACC came in at 7.93. The historical ROIC vs WACC comparison of Energy Transfer LP is shown below:
Overall, The stock of Energy Transfer LP (NYSE:ET, 30-year Financials) gives every indication of being significantly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks worse than 72% of the companies in Oil & Gas industry. To learn more about Energy Transfer LP stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
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