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:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low 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 $39 billion and loss of $0.29 a share. Its operating margin is 15.04%, which ranks better than 80% 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 the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Energy Transfer LP is -25.7%, which ranks worse than 87% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -19.3%, which ranks worse than 72% of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Energy Transfer LP’s return on invested capital is 2.41, and its cost of capital is 7.30. The historical ROIC vs WACC comparison of Energy Transfer LP is shown below:
In summary, The stock of Energy Transfer LP (NYSE:ET, 30-year Financials) is believed to be 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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