Since November 2013, Plains All American Pipeline (NYSE:PAA) has been the recipient of rating upgrades by financial institutions. Goldman Sachs has been followed by Bank of America, Morgan Stanley, and Clarkson Capital on that same month. Deutsche Bank, Citigroup, and Wunderlich followed suit on the following month, while Ladenburg Thalman has been the last one during February 2014. Moreover, Citigroup has boosted the company’s stock target price by $1 to a total of $60 on March 31st, a value considerate a moderate projection. Nonetheless, the stock has not seen heavy transactions by gurus, and only one acquisition done during the last quarter of 2013. What convinced Michael Price (Trades, Portfolio) to take a position in the company? And, what does Renaissance Technologies see to continue increasing its position?
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- PAA 15-Year Financial Data
- The intrinsic value of PAA
- Peter Lynch Chart of PAA
Strong Improvements in Overall Performance
For 2013, Plains All American Pipeline reported remarkable improvements in overall performance. On the one hand, net income grew $300 million year-over-year, while earnings recorded a 17% increment to total $2.80 per share. On the other hand, while growth was registered for all three segments the company operates, it was most significant that of the facilities one at an outstanding 25%.
Moreover, Plains All American Pipeline has seen a progressive widening on operating margin since 2010. That in turn has had a positive impact on cash flow, which is close to the historic high levels recorded in 2011. Debt has also seen increments, but is far from being an issue in the short or long-term given the strong cash flow generated by the business model. That in turn has helped to sustain the recently developed positive tendency on free cash.
The strong performance displayed in 2013 has enticed further investment. Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline commented that the partnership’s 2014 expansion capital program increased to $1.7 billion, which reflects a $300 million increase from the firm’s preliminary targeted range. The good momentum is further supported by a projected grow of distributions per unit by approximately 10% in 2014.
Plains All American Pipeline is continuously investing to expand its existing operations and add new assets at its portfolio, backed by stable financial position. The success story for the firm has been built around supplying the Midwest with crude oil to run its refineries, supported by an impressive network of gathering and transportation pipelines, storage assets, and terminals ideally situated to funnel crude from the Gulf of Mexico, Mid-Continent producers, and Canada into the Midwest. Additionally, paying incremental cash distribution helps the firm retaining investors’ attention.
The downside to Plains All American Pipeline is the great reliance on its supply and logistics segment. Sensitivity has been made clear as operations were disrupted in Western Canada due to high flow rates of water crossings. Most importantly, management has made the decision to modify some transportation routes, leaving a few pipes out of service for a brief period. The opportunity will serve to assess the state of the assets, and reduce the risk of high cost environmental damage.
The upside to Plains All American Pipeline is oil pipelines and storage assets location at well- established oil producing regions. Additionally, operational efficiencies along with steady investments in infrastructural development activities. Worth highlighting is the joint-venture pipeline with Enterprise Products Partners (NYSE:EPD), which intends to complete the connection to its dock facility and the pipeline expansion to enterprises line.
Trading at 19.6 times its trailing earnings, Plains All American Pipeline carries a 50% discount to the industry average. Most importantly, return on assets and return on equity is well above the industry average. In this perspective, the incremental position of Renaissance Technologies and the new position achieved by Michael Price (Trades, Portfolio) is not trivial. And, investors looking for a prosperous long-term investment should give this stock a closer look at.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.