Rating Update: Stock Rating B-Positive (10/8/19)-TC PipeLines LP (TCP).

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BUSINESS

TC PipeLines, LP acquires, owns, and participates in the management of energy infrastructure businesses in North America. The company has interests in eight natural gas interstate pipeline systems that transport approximately 10.4 billion cubic feet per day of natural gas from producing regions and import facilities to market hubs and consuming markets primarily in the Western, Midwestern, and Eastern United States. It serves large utilities, local distribution companies, natural gas marketers, producing companies, and other interstate pipelines, including affiliates. TC PipeLines GP, Inc. operates as a general partner of the company. TC PipeLines, LP was founded in 1998 and is based in Houston, Texas.
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INVESTMENT RATING

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TCP’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

TC PipeLines has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. TC PipeLines has a neutral Appreciation Score of 47 but a very high Power Rating of 85, resulting in the Positive Value Trend Rating.

TC PipeLines’ stock is selling below targeted value. The current stock price of $39.32 compares to targeted value 12 months forward of $45.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
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TC PipeLines has a Power Rating of 85. (This very high Power Rating indicates that TCP has a better chance of achieving attractive investment performance over the near to intermediate term than all but 15% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been favorable; and the recent trend in TCP’s earnings estimates has been favorable. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

TCP’s financial strength is below average. Financial strength rating is 32.
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Relative to the S&P 500 Composite, TC PipeLines LP has both Growth and Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that TCP is higher risk. Relative weaknesses include: low historical profitability, low financial strength, high financial leverage, low expected growth, and high earnings variability. TCP’s valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. TCP has unusually low market capitalization.

CURRENT SIGNALS

TC PipeLines’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

TC PipeLines’ current technical position is very strong. The stock price is in a 7.2 month up move. The stock has appreciated 42.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Extremely important negative changes in investment behavior have recently occurred for TC PipeLines LP (NYSE: TCP): negative upside/downside volume developed, and its shorter term price trend turned down.
Positive development: significant quarterly sales acceleration occurred. Negative development: significant quarterly earnings deceleration occurred.
The stock is currently rated B.
TC PipeLines LP (NYSE: TCP) stock enjoyed a major increase of 25.0% on 10/8/19. The shares closed at $0.00. However, trading volume in this advance was exceptionally low at 48% of normal. The stock has been exceptionally strong relative to the market over the last nine months but has declined -3.3% during the last week.

CASH FLOW

In 2018, TC PipeLines experienced no change in cash of $0.0 million (). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$458.0 million. Non-operating uses consumed -$448.0 million (-98% of EBITDA). Cash taxes consumed -$2.0 million (-0% of EBITDA). Withdrawal of investment from the business totalled +$571.0 million (+125% of EBITDA). On a net basis, debt investors withdrew -$389.0 million (-85% of EBITDA) while equity investors pulled out -$190.0 million (-41% of EBITDA).
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TC PipeLines’ Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tc Pipelines Lp Peer Group. In most years, TC PipeLines was in the top quartile and third quartile. Currently, TC PipeLines is lower quartile at -98% of EBITDA (-$448.0 million).

TC PipeLines’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Tc Pipelines Lp Peer Group as well. In most years, TC PipeLines was in the top quartile. Currently, TC PipeLines is slightly below median at -0% of EBITDA (-$2.0 million).

TC PipeLines’ Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Tc Pipelines Lp Peer Group. In most years, TC PipeLines was in the top quartile and second quartile. Currently, TC PipeLines is at the upper quartile at +125% of EBITDA (+$571.0 million).

TC PipeLines’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tc Pipelines Lp Peer Group. In most years, TC PipeLines was in the top quartile and lower quartile. Currently, TC PipeLines is lower quartile at -85% of EBITDA (-$389.0 million).

TC PipeLines’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tc Pipelines Lp Peer Group. In most years, TC PipeLines was in the lower quartile and top quartile. Currently, TC PipeLines is slightly below median at -41% of EBITDA (-$190.0 million).

TC PipeLines’ Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Tc Pipelines Lp Peer Group. In most years, TC PipeLines was in the second quartile and top quartile. Currently, TC PipeLines is slightly above median at 0% of EBITDA ( $0.0 million).
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TC PipeLines’ Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Tc Pipelines Lp Peer Group. (Since 2016 Cash, %Revenue has acccelerated.) In most years, TC PipeLines was in the lower quartile and third quartile. Currently, TC PipeLines is at the lower quartile at +6%.

PROFITABILITY

TC PipeLines LP’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
A major analytical focus for TCP is a very strong negative trend in pretax operating return a significantly augmented by very strong negative trend in non-operating factors.
The productivity of TC PipeLines LP’s assets rose over the full period 2009-2019: asset turnover has enjoyed a very strong overall uptrend.
More than offsetting this trend, however, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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TC PipeLines LP’s return on equity is lower quartile (-32.8%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-6.6%) reflecting asset turnover that is upper quartile (0.19X) and lower quartile pretax margin (-34.1%).
Tax “keep” rate (income tax management) is upper quartile (110.3%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the upper quartile (4.53X).

GROWTH RATES

Overall, TC PipeLines LP’s growth rate has slowed very considerably in recent years.
TC PipeLines LP’s historical income statement growth has been higher than growth in the balance sheet. Revenue growth has exceeded asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 22.0% per year. (More recently it has been 18.9%.)

Total asset growth has been 1.5% per year. (More recently it has been -5.7%.)

Annual E.P.S. growth has been 3.5% per year.

Equity growth has been -10.7% per year. (More recently it has been -13.7%.)

TC PipeLines LP’s consensus growth rate forecast (average of Wall Street analysts) is 3.0% — in line with the average of the historical growth measures.
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Relative to the Tc Pipelines Lp Peer Group, TC PipeLines’ historical growth measures are highly erratic. Revenue growth (22.0%) has been upper quartile. E.P.S. growth (3.5%) has been at median. Total asset growth (1.5%) has been slightly below median. Equity growth (-10.7%) has been lower quartile.

Consensus growth forecast (3.0%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, TC PipeLines LP’s stock price performance has been below market. Between December, 2008 and October, 2019, TC PipeLines LP’s stock price rose +69%; relative to the market, this was a -47% loss. Significant price move during the period: 1) February, 2017 – May, 2018: -60%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 44.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of 44.7% is upper quartile relative to TC PipeLines LP Peer Group.

Current 5-year total return performance of -3.1% is lower quartile relative to the S&P 500 Composite.
Through September, 2019, with lower quartile current 5-year total return of -3.1% relative to S&P 500 Composite, TC PipeLines’ total return performance is lower quartile relative to TC PipeLines LP Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TCP’s overall valuation is high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/assets is slightly above median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is unavailable.
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TC PipeLines has a major value gap compared to the median. For TCP to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 8.82X to 10.63X. If TCP’s ratio of enterprise value/revenue were to rise to 10.63X, its stock price would be higher by $14 to $53.
For TCP to achieve upper quartile valuation relative to the TC PipeLines LP Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 8.82X to 14.97X. If TCP’s ratio of enterprise value/revenue were to rise to 14.97X, its stock price would increase by $47 from the current level of $39.

VALUE TARGETS

TCP’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
TC PipeLines LP’s current Price Target of $46 represents a +18% change from the current price of $39.32.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 47, the high Power Rating of 85 results in an Value Trend Rating of B.
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TC PipeLines LP’s current Price Target is $46 (+54% from the 2018 Target of $30 and +18% from the 10/08/19 price of $39.32). This dramatic rise in the Target is the result of a -6% decrease in the equity base and a +63% increase in the price/equity multiple. The forecasted decline in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 42.2% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is significantly above the 2013 low of 10%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 30%.

PTR’s cost of equity forecast is 10.6% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is above the 2012 low of 7.2%.
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At TC PipeLines LP’s current price of $39.32, investors are placing a positive value of $5 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of -1.0% per year, and a return on equity of 37.8% versus a cost of equity of 10.0%.
PTR’s 2020 Price Target of $46 is based on these forecasts and reflects an estimated value of existing assets of $34 and a value of future investments of $12.

About John Lafferty 49646 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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