Jonathan Moreland

Inside the Markets: Good Moves in Today’s Market

What energizes insiders and how CPAs can help their clients cash in.

February 17, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]

Units of Enterprise Product Partners (NYSE: EPD), a midstream energy master limited partnership (MLP), have rallied 44 percent since hitting bottom last November, but the securities of this years-long holding of mine remain disappointingly in the red. Despite its attractive cash-flows and indicated yield, the company has obviously been affected by financing and recession concerns spurred by the global financial crisis.

Based on last quarter’s still-impressive results, CPA Insider™ readers may think it seems logical that Enterprise should have been taken down last year with more obviously risky stocks. Sure, revenue for the fourth quarter declined 32 percent year over year due to lower energy prices, but that is not the metric to judge an MLP like Enterprise by.

Enterprise’s net income increased 41 percent, to 44 cents per unit in the fourth quarter. That was even after losing eight cents due to hurricane disruptions. More importantly, distributable cash-flow for this income play rose 26 percent, to $331 million. This allowed Enterprise to raise its quarterly cash distribution by six percent in January, to 53 cents per unit.

The indicated yield on Enterprise Product Partners is now a solid 9.2 percent — even after its two-month run.

But there’s a reason why even blue-chip MLPs like Enterprise have taken a hit. New capital spending has been curtailed by all MLPs because of economic concerns. That’s put a crimp in the firm’s growth prospects for 2009. Also, a recession by definition reduces economic activity, and subsequently, the need for the fuels that power it. Both factors translate into fewer energy volumes being shipped, stored, and processed by Enterprise — and therefore, fewer tolls to be collected by its operations.

Good Credit

The good news is that the worst fears for the MLP sector didn’t play out. Concerns about MLPs getting any financing at all may still haunt smaller outfits, but Enterprise proved it can still tap capital markets when it recently raised $1.6 billion of debt and equity capital. When this crisis passes, Enterprise should be among the first MLPs able to tap capital again to ramp up growth via new projects and acquisitions.

In the meantime, the firm’s 1.2 times cash-flow coverage of its just-raised distribution is generating a yield over nine percent, which is about as safe as any that your clients are likely to find in this market.

In today’s market where it’s so easy to lose money, I haven’t been advocating averaging down into many of my losing positions over the past year. After all, if I was wrong enough to lose 20 percent or more in a stock during this crisis, what right do I have to assume that the position is finally free of the effects of this insidious bear market? But units of Enterprise are an exception. And I think they remain a solid buy, and even worth averaging down into.

Insiders seem to concur. I’ve ranked Enterprise as having a positive insider profile pretty consistently for years now. But much of the volume of insider purchases has been from the firm’s very wealthy (and savvy) chairman, Dan Duncan.

Last fall, however, four other insiders finally joined Duncan in buying into their firm’s sagging shares. Altogether, the group purchased $1.8 million worth of EPD at an average cost of $22.22 per unit. Nearly half the total buys were by execs other than Duncan, and three of the recent buyers increased their holdings substantially with their latest purchases.

This was a welcome refresher to EPD’s insider signal, and a reminder that having a longer-term, total-return play in your portfolio in this awful market is as good a move as any.

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Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights.