Why is epd down?
Fully-integrated midstream MLP Enterprise Products Partners (NYSE:EPD) stock has recovered remarkably from its September lows. In an early August article, we cautioned investors to avoid chasing the rally then.
EPD has consolidated sideways over the past two months as the underlying energy markets weakened further. Notwithstanding, EPD's operating model shields it from significant volatility in the underlying markets with its contractual agreements on its volume.
As such, it has helped EPD maintain robust profitability margins through economic cycles, lifting its distribution over time for investors. Consequently, EPD trades at a higher valuation multiple on average than its downstream/upstream peers in the oil & gas value chain. However, it trades at a discernible discount against the S&P 500 oil & gas storage and transportation industry.
We assess that EPD's diversified growth drivers should help mitigate potential weakness from a particular segment. Notwithstanding, EPD is not immune to a broad-based normalization in the underlying markets, which could slow the growth in its distributable cash flow (DCF).
As such, we postulate that it could impact the buying upside from the current levels, as Wall Street's estimates remain optimistic about the industry's prospects. Hence, we believe that EPD could be hit by potential risks of earnings compression if the market anticipates further weakness in the underlying markets.
EPS last traded at an NTM dividend yield of 8.1%, well above its 10Y mean of 6.5%. Therefore, it's arguable that EPD's valuation doesn't seem aggressive as we enter a potential recession.
Still, we gleaned that EPD's price action indicates that buyers' momentum has continued to weaken even as it consolidates. Therefore, we urge investors to remain patient, as we postulate a material re-rating is unlikely in the near term.
Revise from Sell to Hold for now.
EPD last traded at an NTM dividend yield of 8.1%, close to the one standard deviation zone over its 10Y mean. However, we noted that the market rejected further buying upside as its yield moved closer to its 10Y average at EPD's June highs.
Hence, we assess that the market has likely de-rated EPD, expecting potential earnings compression moving ahead.
Therefore, we urge investors to avoid adding exposure in EPS close to its mean to improve their reward/risk in anticipation of further weakness in the energy markets.
Recessionary headwinds have continued to build up, worsened by the recent COVID flare-ups in China, as oil bulls continued to feel intense pressure from sellers. Furthermore, the market appeared to have "disregarded" OPEC+'s previous announcement of production cuts, as the market focused on risks of demand destruction.
However, we also gleaned that WTI crude oil price action appears to be oversold after the recent steep selloff. As such, it should find support if oil bulls return vigorously to defend against further selling.
NYMEX natural gas futures have also recovered remarkably from their October lows. However, we assess that further spikes akin to what we saw in August/September are unlikely as Europe works out its plans to cap gas prices moving forward. Notwithstanding, it remains work-in-progress for now.
Accordingly, we deduce that the consensus estimates are credible, modeling for a steep normalization in its adjusted EBITDA growth through FY24. As a corollary, it's also expected to impact its DCF growth.
Hence, buyers' sentiments could be affected unless the market presents a highly attractive valuation to capitalize on.
Moreover, oil and gas analysts remain optimistic about EPD and its peers' prospects through the recession. Despite that, we gleaned that analysts have started writing down their industry earnings estimates. Therefore, the downward revisions could accelerate if the underlying markets weaken further.
Moreover, the bifurcation between the industry and the broad market couldn't have been more different. As seen above, analysts have written down earnings estimates for the market significantly through November.
But, oil and gas analysts don't expect the hit from the potential recession to stymie the earnings growth of EPD and its peers as much.
However, the message from the energy markets suggests that these analysts could have been too optimistic, as seen in the recent downward earnings revision in November.
Therefore, we urge investors to be cautious in expecting EPD and its peers to withstand the recession much better than the market if the price action in the underlying markets deteriorates further.
Since June, EPD has been forming lower highs as buyers failed to regain significant upward momentum.
However, buyers managed to stake the defense of its September lows robustly, in line with the support seen in February and July.
Coupled with our concerns about potential earnings compression, we don't find the current levels attractive despite its 8% yields. Hence, we urge investors to remain patient, as EPD could continue to consolidate, with reward/risk skewed toward the downside from here, potentially revisiting its September lows.
The Zacks rating relies solely on a company's changing earnings picture. It tracks EPS estimates for the current and following years from the sell-side analysts covering the stock through a consensus measure -- the Zacks Consensus Estimate.
The power of a changing earnings picture in determining near-term stock price movements makes the Zacks rating system highly useful for individual investors, since it can be difficult to make decisions based on rating upgrades by Wall Street analysts. These are mostly driven by subjective factors that are hard to see and measure in real time.
Therefore, the Zacks rating upgrade for Enterprise Products basically reflects positivity about its earnings outlook that could translate into buying pressure and an increase in its stock price.
Most Powerful Force Impacting Stock Prices
The change in a company's future earnings potential, as reflected in earnings estimate revisions, has proven to be strongly correlated with the near-term price movement of its stock. That's partly because of the influence of institutional investors that use earnings and earnings estimates for calculating the fair value of a company's shares. An increase or decrease in earnings estimates in their valuation models simply results in higher or lower fair value for a stock, and institutional investors typically buy or sell it. Their bulk investment action then leads to price movement for the stock.
For Enterprise Products, rising earnings estimates and the consequent rating upgrade fundamentally mean an improvement in the company's underlying business. And investors' appreciation of this improving business trend should push the stock higher.
Harnessing the Power of Earnings Estimate Revisions
As empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock movements, tracking such revisions for making an investment decision could be truly rewarding. Here is where the tried-and-tested Zacks Rank stock-rating system plays an important role, as it effectively harnesses the power of earnings estimate revisions.
The Zacks Rank stock-rating system, which uses four factors related to earnings estimates to classify stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here >>>>.
Earnings Estimate Revisions for Enterprise Products
This provider of midstream energy services is expected to earn $2.60 per share for the fiscal year ending December 2023, which represents a year-over-year change of 3.2%.
Analysts have been steadily raising their estimates for Enterprise Products. Over the past three months, the Zacks Consensus Estimate for the company has increased 3.7%.
Unlike the overly optimistic Wall Street analysts whose rating systems tend to be weighted toward favorable recommendations, the Zacks rating system maintains an equal proportion of 'buy' and 'sell' ratings for its entire universe of more than 4000 stocks at any point in time. Irrespective of market conditions, only the top 5% of the Zacks-covered stocks get a 'Strong Buy' rating and the next 15% get a 'Buy' rating. So, the placement of a stock in the top 20% of the Zacks-covered stocks indicates its superior earnings estimate revision feature, making it a solid candidate for producing market-beating returns in the near term.
You can learn more about the Zacks Rank here >>>
The upgrade of Enterprise Products to a Zacks Rank #1 positions it in the top 5% of the Zacks-covered stocks in terms of estimate revisions, implying that the stock might move higher in the near term.
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Zacks Investment Research
Enterprise Products Partners (EPD 0.89%) stock lost steam on Monday and was trading down 4.4% as of 1 p.m. ET.
Enterprise Products wasn't the only oil and gas stock to crash today, but here's the thing: It shouldn't have crashed at all.
Oil prices plunged Monday morning, with prices of both West Texas Intermediate crude and Brent crude trading more than 5% lower, as of this writing. Oil prices hit two-week lows today and are now significantly below their multi-year March highs.
So far, the war between Russia and Ukraine had hugely helped lift oil and gas prices as it disrupted supply. But with large oil importer China now putting more cities and provinces under lockdown as coronavirus cases surge -- it put parts of Beijing under lockdown this past weekend -- oil experts foresee a fall in demand for oil, and that hit prices hard today.
As expected, oil stocks crashed today, but so did Enterprise Products even though it's a midstream company that's not susceptible to the fluctuations in oil and gas prices as it processes, stores, and transports natural gas, natural gas liquids, crude oil, and other products under fixed-price, long-term contracts. The price of natural gas, in fact, was up nearly 1% as of this writing.
Perhaps this is what investors fear: Oil prices hugely influence the capital spending decisions of oil producers. Any fall in the demand and prices of oil will hurt drilling activity, and that could mean fewer new orders and projects for Enterprise Products.
Enterprise Products will also report its first-quarter numbers on May 2, and the market could already be anticipating decelerating growth in a falling oil price environment. With the stock also surging in recent weeks, the market perhaps sees limited upside.