KMI is a buy because the market is currently mispricing the company due to fears over their CO2 segment and their debt level.
First, it is currently being rumored that management is considering the sale of its CO2 business. This would be a positive because it would take away the concerns regarding CO2 and could help lead to a higher multiple. Additionally, the company’s backlog would become much more concentrated in higher growth areas if this segment is sold.
Second, the debt picture is misunderstood. The company currently has an investment grade rating from the rating agencies and currently has a target debt level of 4.5x EBITDA. However, management is currently overachieving their own standards when it comes to realization of EBITDA from the backlog. With several major projects coming into service during the next 18 months. The FY2 and FY3 EBITDA numbers should be substantially better due to management’s success and even if management misses slightly the EBITDA figure should still improve, the question becomes by how much?
Given these two misunderstandings, the market is currently trading KMI at the -1 St. Dev. of its earnings range when it should be trading much closer to average.
Holmes, Christopher, "Research Project in Finance: Kinder Morgan Inc. (KMI)" (2019). Student Scholarship. 29.
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Dr. Guarango Banerjee