Searching for Value Stocks
- By Alberto Abaterusso
I was searching for value stocks this morning. From my point of view, value stocks are not only those that may be priced by the stock market below what it is called their intrinsic value and waiting, after having established a position, for their value to be recognized by the market.
My concept of value accretion also gets my stock screener set on companies that are returning to their shareholders a significant amount of their free cash flow - that is the operating cash flow that is left after having used funds either to acquire or upgrade physical assets or pursue a project - in the form of dividend.
Warning! GuruFocus has detected 3 Warning Signs with BPL. Click here to check it out.
The intrinsic value of BPL
Concerning the dividend that a company is paying to its shareholders I have some ways to decide whether the payout may be considered an adequate remuneration of the capital invested in the purchase of the company's shares.
One way is to compare the dividend yield - that is a financial measure of how much the company pays out every year to its shareholders in dividends regarding its share price - with a benchmark representing an average yield of a set of the best-performing stocks in the market in terms of dividend paid and in terms of their loyalty in paying out a part of their free cash flow to the shareholders. As a benchmark, I like to use the Standard & Poor's 500 dividend yield that is currently set at 1.88%.
Therefore, I can consider as an adequate remuneration of invested capital only those stocks with dividend yields higher than the current 1.88%. This value may also be an indication that maybe the right time either to open a position or to increase it in a particular stock is there.
Since the dividend is part of the net profit that the company decides not to retain and to distribute instead to its shareholders, its future payment must rely on a likelihood that the company not only will continue to close a sufficient number of fiscal years ahead with a positive bottom line but also that its business is set to expand so that the dividend may also be increased by the company over time.
Therefore, I also look at those stocks whose EPS is projected by analysts to grow for at least the next five years' time. An investor who is looking for good companies rather than good stocks is generally also in search of a stream of dividends from which he/she can benefit for the whole time its portfolio is invested in one of these stocks. And this span of time should be long enough, let's say not less than five years. This category of investors is called income investors.
Another way to determine whether the stock may be a value stock is to compare its earnings yield - that is the EPS (ttm) divided by the share price - to that one of the 20-year high quality market (HQM) corporate bond. As a benchmark, I am using the yield of 4.3% on the 20-year HQM corporate bond that has been computed as an average of the last 12 months' spot rates from a set of high-quality corporate bonds, which are rated AAA, AA or A and that accurately reproduce the performance of the high-quality corporate bond market. Buckeye's current earnings yield is 6.4%.
So I run my stock screening for stocks that meet the aforementioned criteria plus others such as a market capitalization greater than $3 billion, a positive growth in EPS over the next five years, a price-book (P/B) ratio between 0 and 2 and a price-earnings (P/E) ratio not greater than 20, and I ended up with the following stock: Buckeye Partners LP (BPL).
Buckeye Partners is a U.S. liquid petroleum products pipelines owner and operator.
The company's operations are mainly located in the U.S. and are structured in three main segments - Domestic Pipelines & Terminals, Global Marine Terminals and Merchant Services.
The Domestic Pipelines & Terminals segment includes transportation activities of liquid petroleum products, refined petroleum products and crude oil thanks to a 6,000-mile long pipeline located in the northeastern and upper midwestern regions of the U.S. The company serves over 115 active terminals which have in total a storage capacity of more than 56 billion barrels.
The global marine terminals segment holds seven liquid petroleum product terminals and with a product storage capacity of 62 million barrels. These terminals are located in the Bahamas, in Puerto Rico and in the Caribbean. In the U.S. they are located in the New York Harbor and in Corpus Christi, Texas.
The company is also a provider of merchant services for the distribution of refined petroleum products.
Its business is well-diversified, geographically speaking, and most of its EBITDA, let's say about 70%, derives from refined products that primarily include gasoline, jet fuel, diesel and heating oil. Since Buckeye operates as a midstream operator, during a period characterized by falling oil prices, its business suffers much less than that of oil producers. For this reason and because Buckeye Partners has a rich pipeline of projects that, through organic growth and acquisition, will help its business to expand over time, analysts today have set an annual growth in EPS of more than 3% over the next five years. Over the next fiscal year period, Buckeye's earnings are forecasted to increase by nearly 13%, from a figure of $3.56 per share in fiscal 2017 to a figure of $4.02 per share in fiscal 2018.
Buckeye Partners is trading at $56.52 per share with a market capitalization of $7.94 billion, a price-book (P/B) ratio of 1.82, a price-sales (P/S) ratio of 2.29, a price-earnings (P/E) ratio of 15.63 and an EV-EBITDA ratio of 13.22.
The company currently distributes to its shareholders an annual dividend of $5.05 per share - through quarterly payments of $1.2625 - for a dividend yield of 8.97%.
The energy stock is trading only a few dollars above its 52-week low of $54.33 per share (the 52-week high is $73.01 per share). The forward P/E ratio is 14.06 that multiplied by the EPS - as forecasted by analysts for full fiscal 2017 - of $3.56 yields to a value of $50.05 or $56.52 when the forward P/E ratio is combined with the EPS of $4.02. The latter is an estimate for Buckeye Partners' full fiscal 2018 EPS.
The average target price is $70.46 per share, and the recommendation rating is 2.2 out of 5.
Disclosure: I have no positions in any stock mentioned in this articles.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Signs with BPL. Click here to check it out.
The intrinsic value of BPL
