ONEOK, Inc. (NYSE:OKE) closed at $93.31 on October 16. The stock has returned 11.4% over the last 6 months, compared with a 10.5% return for the Insider Monkey Billionaire Index and 9.3% for the State Street SPDR S&P 500 ETF Trust.
ONEOK gathers and processes natural gas liquids across the midcontinent and the Permian, and has spent recent years buying its way into crude and refined products as well. That shopping list is the reason the stock looks cheap.
What takes longer to work out is whether the company has earned that discount, or merely bought it.
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Is ONEOK (OKE) Cheap at 14 Times Next Year’s Earnings?
The Case for the Discount Being Wrong:
The business is bigger than it was and growing. Revenue rose 52.80% in the most recent quarter, and the stock is up 36.16% over the past year.
The income is real too. The yield is 4.59%, a solid payout for a pipeline corporation, and it is covered comfortably by what the business earns. ONEOK features in our 10 Best Pipeline and MLP Stocks to Buy According to Hedge Funds. To see which names rank above it, click HERE.
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Why It Might Deserve It:
Most of that revenue growth was bought rather than built. ONEOK has been assembling its position through acquisitions, and acquired revenue arrives with acquired debt and acquired integration risk attached.
The margin tells the rest. Only 13.25% of revenue survives as operating profit, well below the gathering and transport names. A large part of what ONEOK does is buy liquids and sell them on rather than charge a toll for moving them. Buying and reselling is a thinner business and a more volatile one.
Debt sits at 143.07% of equity, normal enough for midstream but less comfortable when the earnings underneath are not purely fee-based.
Cheap, or Priced Correctly:
At 14.49 times what analysts expect next year, the shares are cheaper than most of midstream. The question is whether a company that keeps thirteen cents of every revenue dollar should carry the same multiple as one that keeps fifty.
A discount for a lower quality mix of earnings is not a mistake. It is the market doing its job. The bargain only exists if the acquired businesses settle into something steadier than what they look like now.
A discount with a reason behind it is not the only way to buy income here. 9 Best Energy Dividend Stocks to Invest In Now covers names where the earnings behind the payout are simpler.
Conclusion:
The stock is priced at a discount, and there is a reason for it. ONEOK has grown quickly by buying, and what it bought earns less on every dollar than the pure transport businesses it sits beside. That is not a flaw so much as a different business wearing the same label. Whether it is a bargain depends on how much of the trading end settles into fees. Watch the margin rather than the revenue, because revenue is the easy part to buy.
Source: finance.yahoo.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.
