The Kinder Conundrum

This note was originally published at 8am on April 17, 2015 for Hedgeye subscribers.

“Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission.” – Gerald Loeb, The Battle for Investment Survival




After rolling up its MLPs in December 2014, Kinder Morgan Inc. (KMI) is now the third-largest energy company in the S&P 500 by enterprise value ($137 billion) and fourth-largest by market cap ($95 billion).  It’s also one of the more polarizing names out there – you either love it or you hate it.


KMI kicked off the earnings season for the energy sector on Wednesday, and with KMI being a relatively new and large name in many portfolio managers’ benchmarks, we figured that the generalists that subscribe to the Early Look would be interested in, and benefit from, our latest thoughts on KMI – the company and the stock.  Regarding the former, the commentary below was sent to our Energy sector subscribers yesterday:


The Kinder Conundrum - kmi


“In its 1Q15 report … Kinder Morgan Inc. (KMI) declared a quarterly dividend of $0.48/share, reiterated its 2015 dividend target of $2.00/share, and emphatically reiterated its long-term dividend growth guidance of 10% p.a. through 2020.  KMI bulls need not read any further.


The quarter was soft overall as the more-commodity-sensitive segments of CO2 and Natural Gas Pipelines posted a combined 5% YoY decline in segment cash flow.  Adjusted EBITDA came in at $1,743MM, down 1% YoY and missed the consensus estimate of $1,861MM by 6%.  EBIT was $1,193MM, down 5% YoY.  Pre-tax earnings were $679MM ($0.31/share), down 16% YoY.  (All metrics are "before Certain Items.")  


KMI incurred ~$935MM of CapEx in the quarter, $104MM (11%) of which was classified as sustaining / maintenance.  It spent ~$3.2B on acquisitions, ~$3,060MM on Hiland and ~$160MM on the Vopak terminals.  The Hiland acquisition closed on February 13th, so it was a significant contributor to the 1Q15 numbers.


Free Cash Flow (defined here as EBITDA – net interest expense – CapEx) was ~$295MM or $0.14/share.


Rich Kinder remarked on the call, “…our enormous footprint and our diversified set of mostly fee-based assets can produce very good results, even in times of tumultuous market conditions.”


Very good results?


EBITDA and EBIT were down YoY in 1Q15 despite $9.4B of capital invested since the start of 2014 ($5.0B of CapEx – ~$1.0B per quarter – and $4.4B of acquisitions).  That’s mediocre, at best.


What is exceptional about KMI is 1) its valuation at 20x EV/EBITDA, 29x EV/EBIT, 35x P/E (pre-tax!), and a 1.3% FCF yield (all metrics are 1Q15 annualized); 2) its leverage at 6x debt/EBITDA and 9x debt/EBIT; and, of course, 3) its dividend payout ratios at +230% of net income and +150% of pre-tax income.”     




Here’s our opinion of KMI – the company – in as succinct of a form as possible, a 140 character #tweet:


MegaCap energy conglom. Capital intensive, cyclical, competitive. Avg ROIC. Super-levered. Low organic growth. Roll up. Ponzi divi.


And all of that really isn’t that hard to see.  Which of those points could you convincingly argue the other side of? 


The debate and difficulty lies in what to do with KMI the stock here. 


Our current view, one that is, of course, subject to change, is that it’s just one to watch from the sidelines.  We apologize to the bulls for not joining the rest of the sell-side in the Rich Kinder booster club, and to the bears for not betting on the imminent collapse of the evil empire, but the risk / reward set-up does not warrant action at this time and price. 


The challenge on the short side is that the higher KMI’s valuation, particularly relative to its peer group, the more “accretive” each acquisition will be.  Say what you want about this growth strategy (and we suggest you re-read Buffett’s thoughts on it on pages 29 and 30 of the latest BRK letter!), but the market has bought into it and it’s going to work until it doesn’t. 


Reflexivity is clearly at work; we’d consider a short position in KMI on the way down.  But for now, we’re interested in playing KMI’s well-advertised acquisition ambitions via second derivatives.  More on that to come…


We’ll leave it there on this battleground stock.  If you own KMI, we hope that you at least know what you own!


Enjoy the weekend,


Kevin Kaiser

Managing Director

The Kinder Conundrum - 04.17.15 chart

Darius Dale: #NFLDraft “Stock Picking”

Hedgeye’s very own all-star offensive lineman and former NFL prospect himself Darius Dale (Yale c/o 2009) provides his insider’s perspective on this year’s offensive line draft class.


In addition to knowing a thing or two about global macro ... #DaleKnowsFootball.


CLICK HERE to access the presentation; the long/short investment recommendations may shock you.


Because games are won and lost in the trenches...


Darius Dale: #NFLDraft “Stock Picking” - dale



Takeaway: Margin improvement drove FY guidance slightly higher. LV Locals missed expectations.



  • Non-gaming initiatives working out
  • Consumers growing more confident and spending more
  • Locals market solid- non-gaming grew in 7th consecutive quarter.  Orleans and Suncoast did well. 
    • EBITDA fell due to $1m disruption at Suncoast (will continue until road work ends in June). 
    • Sports book win down 80% related to Super Bowl bets
  • Downtown LV:  solid Hawaiian play and increased Fremont Street. Non-gaming up 3%. Lower fuel costs from Hawaiian service.
  • Regionals:  Kansas Star (improved marketing plans).  IP (strong flowthrough). Blue Chip (revenue and EBITDA grew). Treasure Chest (revs up 8% thanks to visitation and slot play). Par-a-Dice:  adapting to new competitive landscape well. Delta Downs (well ahead of expectations, strong visitation from core customers)
  •  Borgata:  $5.5m property tax benefits; solid gaming volumes; more cost efficiencies. Contributed to 14,000 more room nights in 1Q.  
  • AC Same-store gaming revenues grew 5% in 1Q 2015
  • Customer is changing:  younger demographic of customers; need to reposition non-gaming amenities
  • Cash room rates at LV: +14%
  • Orleans/Blue Chip renovation scheduled to be completed by end of 2015
  • 20 new F&B concepts will open in next 12 months
  • Debt reduced by $80m in 1Q
  • 1Q capex: $19m ($7m Peninsula, $5m Borgata); will meet previously issued FY capex ($100m maintenance (Boyd), $15m maintenance (Peninsula) $45m project capex, Borgata around $25m)
  • Guidance raised:  
    • Expect LV road construction to impact 2Q (about ~$1mm)
    • Expect LV Locals and Downtown EBITDA to grow 2-3% : also for Q2
    • Expect Midwest/South EBITDA to grow 3-4%: also for Q2
    • Expect Borgata EBITDA ($160-165m) 
  • Borgata leverage ratio: 4.2x (down from 7.0x leverage in March 2014)

Q & A

  • Margins are sustainable, particularly in payroll/marketing
  • Delta Downs:  through April, continue to be very strong
  • LV Q2: trends from Q1 are continuing into Q2.  April is similar to Q1. May is looking good. June is looking soft. Nothing that gives them concern. 
  • REIT option - continue to evaluate
  • LV Downtown: cost cuts (half of it was due to lower fuel costs)
  • Raised FY guidance all due to stronger Q1 results
  • Pacquiao fight and Rock in Rio:  will take advantage by levering up rates
  • Slot replacement cycle is fairly normal

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Casual Dining Shorts?

Casual Dining Shorts? - 6


Today, we find it prudent to reiterate our shorts and remind people why we have zero casual dining names on our current Investment Ideas list.


While seeing BWLD and PNRA whiff on earnings has really dampened the sentiment around restaurants in the early innings of 1Q15 earnings season, we believe signs of trouble have been brewing for quite some time.  This is particularly true in the casual dining industry, which despite being in the midst of a secular decline, currently trades close to a five-year peak multiple. 


Casual Dining Index: EV/EBITDA (NTM)

Casual Dining Shorts? - 11

Source: FactSet


Given the recent increase in gasoline prices, decrease in consumer confidence, labor cost pressures, and softening industry sales, we believe there is more downside on tap for restaurants stocks.


Regular Gas Price

Casual Dining Shorts? - 2



Casual Dining Shorts? - 3


Barring an exception, which we will call out if/when it is appropriate, we would not be comfortable owning any casual dining names.  CHUY and DFRG continue to be two of our favorite shorts, but the majority of names could be due for a continued correction.  See our short bench for more ideas.


Casual Dining Shorts? - 4


Casual Dining Shorts? - 5


Latest Relevant Note: 1Q15 Investment Ideas Earnings Preview


Takeaway: We reiterate our intermediate-to-long term bullish bias on Japanese equities and view any near-term weakness as a buying opportunity.

Watch the brief 2min summary of our latest thoughts on Japan in light of the disappointing BoJ statement today.


Thesis summary:


  • Today in Japan, the lack of QQE expansion in spite of the BoJ lowering its forecasts for both growth (FY15: down -10bps to +2%) and inflation (FY15: down -20bps to +0.8%) resulted in the Nikkei 225 selling off -2.7%.
  • In conjunction w/ Kuroda’s still-sanguine guidance and our positive outlook for Japanese GDP growth over the next two quarters, marginal easing has now been officially punted well into 2H15.
  • Consensus expects a move in October and we currently have no reason to argue for one month sooner or later than that; we just know two catalysts need to materialize before the BoJ can justify expanding the pace of its asset purchases:
    • The YoY RoC in the USD/JPY cross needs to  converge towards zero.
    • Survey based inflation measures (namely Tankan) need to trend lower  – which they are likely to do if our forecast of continued and material disinflation in Japan proves prescient.
  • All told, we remain bullish on Japanese equities and continue to expect foreign inflows to support the market in light of the “win-win-win” thesis we outlined in a presentation last week (CLICK HERE to access the video replay).


BUY THE DIP IN JAPAN - DM Idea Flow Monitor


Feel free to ping us with any follow-up questions.




Darius Dale


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.