Enterprise Products Partners: A Battle-Tested Bargain?

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When it comes to master limited partnerships (MLPs), few names are as well known or respected as Enterprise Products Partners (NYSE: EPD).

The midstream energy juggernaut has built a reputation over the years as a steady toll collector, generating tons of cash flow from its network of pipelines, processing plants, storage facilities and export terminals.

Its world-class portfolio of midstream infrastructure is concentrated in some of the most productive oil and gas basins in the country, particularly the Permian. In the first quarter, Enterprise’s systems handled a staggering 12.3 million barrels of crude oil and natural gas products per day.

However, with the industry leader trading near all-time highs, many may be wondering whether there’s still value to be had. So let’s run it through our Value Meter.

Chart: Enterprise Products Partners (NYSE: EPD)

We’ll start with the company’s enterprise value-to-net asset value (EV/NAV) ratio, one of the key metrics we look at in The Value Meter. Enterprise’s EV/NAV of 3.2 is substantially less than the average of 6.8 among other companies with positive net assets and at least four straight quarters of positive free cash flow.

On the surface, that makes the stock look like quite a bargain, as you can essentially scoop up Enterprise’s cash-generating assets for less than $0.50 on the dollar.

But let’s put that valuation into context.

Investors typically don’t pay lofty premiums for midstream assets. Plus, Enterprise is a mature, slow-growth company operating in a highly capital-intensive industry. Its financial success is largely driven by its scale and operational efficiency rather than rapid ascension or innovation, and it maximizes its cash flow by keeping a lid on costs and running its assets at high utilization rates.

So Enterprise’s relatively modest EV/NAV is actually par for the course.

But what the company lacks in high-growth potential, it makes up for in reliability. Its investment appeal truly comes from its steady cash generation.

Over the past four quarters, the company’s free cash flow averaged 3.9% of its net asset value, compared with the average of 8.6% for companies with four straight quarters of positive free cash flow.

Altogether, with such small-yet-steady cash flow generation, it’s no wonder the company’s EV/NAV is where it is. In fact, it seems highly appropriate.

Also, as an MLP, Enterprise’s business model comes with tax and regulatory complexities that don’t apply to other kinds of companies. But they’re intended to help the company avoid double taxation of its profits and to ultimately deliver more value to shareholders.

For example, MLPs typically offer higher yields than the average dividend-paying stock. And with a current distribution yield north of 7% and an excellent distribution growth history, Enterprise’s stock is a very attractive income play.

In fact, it’s a member of the prestigious “Dividend Aristocrat” club, which includes companies with at least 25 consecutive years of dividend increases.

For investors seeking a battle-tested MLP with an enviable balance sheet, a proven management team and a strong track record of rewarding unitholders, Enterprise is hard to beat. Thanks to its unique combination of stability, yield and growth, Enterprise is the kind of slow and steady compounder that lets income investors sleep well at night.

And at today’s valuation, you’re not paying an egregious price for quality. You’re getting exactly what you pay for.

The Value Meter rates this one as “Appropriately Valued.”

The Value Meter

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