Why Earnings Season Could Be Great for Morgan Stanley (MS)
Kinder Morgan Inc KMI is expected to post second-quarter 2018 results on Jul 18.
In the last reported quarter, the company delivered positive earnings surprise of 4.8%. Moreover, the company has pulled off an average positive earnings surprise of 7.1% in the last four quarters. Let’s see how things are shaping up prior to the announcement.
Which Way are Estimates Treading?
Let’s look at the estimate revisions to get a clear picture of what analysts are thinking about the company before earnings release.
Estimates for second-quarter earnings have seen no upward movement but a downward one in the last 30 days. The Zacks Consensus Estimate of 19 cents reflects an improvement of about 35.7% from a year ago.
Further, analysts polled by Zacks expect revenues of $3,422 million for the impending quarter, showing an increase of 1.6% year over year.
Factors to Consider
Kinder Morgan has the largest network of natural gas pipelines in North America, spread over almost 85,000 miles. Notably, the company’s midstream properties are linked to all the prospective plays in the United States that are rich in natural gas.
The extensive networks of natural gas pipelines, where the company has invested heavily, provide stable fee-based revenues. In fact, Kinder Morgan expects significant part of its cash flow generation to come from fees charged for midstream properties in the upcoming quarters. The revenues from midstream properties will be reflected in the quarterly results.
The company’s Trans Mountain pipeline, which was plagued by uncertainties, has been bought by the Government of Canada for C$4.5 billion. Kinder Morgan will work with the government to seek a third-party buyer for the pipeline and related expansion project through Jul 22, 2018. The outcome is expected to have a positive impact on its balance sheet, which will be reflected in the upcoming quarterly results.
However, a weak balance sheet is a concern. As of first-quarter 2018, total debt — short and long term — is pegged at $37.2 billion. Debt capitalization ratio of 49.9% is higher than the industry ratio of 50.7%, which depicts the company’s exposure to debt. The company may face liquidity issues, if its debt continues to increase.
Price Performance in Q2
During the quarter, Kinder Morgan has outperformed the industry. In the aforesaid period, the stock has gained 17.3% compared with the industry’s rise of 8%.
Our proven model does not conclusively show that Kinder Morgan is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: Earnings ESP for the company is -5.88%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Kinder Morgan carries a Zacks Rank #3.
Please note that we caution investors against stocks with a Zacks Rank #4 or5 (Sell Rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Though earnings beat looks uncertain for Kinder Morgan, here are some firms that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat this quarter:
Occidental Petroleum Corporation OXY is an international oil and gas exploration and production company. The company has an Earnings ESP of +6.84% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
ConocoPhillips COP, based in Houston, TX, is a major global exploration and production (E&P) company. The company has an Earnings ESP of +13.46% and flaunts a Zacks Rank #1.
Houston, TX-based EOG Resources, Inc EOG is a major independent oil and gas exploration and production company. The company has an Earnings ESP of +4.60% and a Zacks Rank #1.
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