Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Magellan Midstream Partners LP (MMP) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Magellan Midstream Partners, L.P. (Magellan) is engaged in the transportation, storage and distribution of refined petroleum products and crude oil. The Company’s business segments include Refined Products, Crude Oil and Marine Storage. The Company’s refined products segment consists of Magellan’s 9,500-mile refined products pipeline system with 53 terminals, as well as 27 independent terminals not connected to the Company’s pipeline system and its 1,100-mile ammonia pipeline system. Magellan’s crude oil segment consists of approximately 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels, of which 12 million is used for leased storage. Its marine storage segment consists of five marine terminals located along coastal waterways with an aggregate storage capacity of approximately 26 million barrels.
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Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $67.04 |
| MG Value | $111.93 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $42.16 |
| Value Based on 0% Growth | $24.71 |
| Market Implied Growth Rate | 7.28% |
| Net Current Asset Value (NCAV) | -$14.66 |
| PEmg | 23.06 |
| Current Ratio | 0.95 |
| PB Ratio | 8.14 |
Balance Sheet – March 2015
| Current Assets | $396,000,000 |
| Current Liabilities | $419,000,000 |
| Total Debt | $3,184,000,000 |
| Total Assets | $5,605,000,000 |
| Intangible Assets | $57,000,000 |
| Total Liabilities | $3,731,000,000 |
| Outstanding Shares | 227,500,000 |
Earnings Per Share
| 2015 (estimate) | $3.10 |
| 2014 | $3.69 |
| 2013 | $2.56 |
| 2012 | $1.92 |
| 2011 | $1.83 |
| 2010 | $1.42 |
| 2009 | $1.11 |
| 2008 | $0.70 |
| 2007 | $1.30 |
| 2006 | $1.12 |
| 2005 | $1.02 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.91 |
| 2014 | $2.64 |
| 2013 | $1.99 |
| 2012 | $1.61 |
| 2011 | $1.39 |
| 2010 | $1.16 |
Dividend History
Free Cash Flow
Conclusion:
Magellan Midstream Partners LP does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.39 in 2011 to an estimated $2.91 for 2015.  This level of earnings growth outpaces the market’s implied estimate of 7.28% annual earnings growth over the next 7-10 years, and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Magellan Midstream Partners LP (MMP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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