The stock of Magellan Midstream Partners LP (NYSE:MMP, 30-year Financials) shows every sign of being modestly undervalued, 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 $44.83 per share and the market cap of $10 billion, Magellan Midstream Partners LP stock is believed to be modestly undervalued. GF Value for Magellan Midstream Partners LP is shown in the chart below.
Because Magellan Midstream Partners LP is relatively undervalued, the long-term return of its stock is likely to be higher than its 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. Magellan Midstream Partners LP has a cash-to-debt ratio of 0.00, which ranks in the bottom 10% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Magellan Midstream Partners LP's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Magellan Midstream Partners 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. Magellan Midstream Partners LP has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.4 billion and earnings of $3.61 a share. Its operating margin is 36.27%, which ranks better than 91% of the companies in Oil & Gas industry. Overall, the profitability of Magellan Midstream Partners LP is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Magellan Midstream Partners 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Magellan Midstream Partners LP is -0.7%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is 1.4%, which ranks in the middle range 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, Magellan Midstream Partners LP's return on invested capital is 10.77, and its cost of capital is 7.09. The historical ROIC vs WACC comparison of Magellan Midstream Partners LP is shown below:
To conclude, Magellan Midstream Partners LP (NYSE:MMP, 30-year Financials) stock is believed to be modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Magellan Midstream Partners LP stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.