In case you missed it... Barron’s ran a story with the headline below over the weekend. The story prominently features the analysis of Hedgeye Energy analyst Kevin Kaiser. Of course, Kaiser has been a longtime bear on Kinder Morgan (KMI) and a vocal critic of the dangers of MLPs.
Barron’s writer Andrew Bary calls Kaiser, “the company’s most outspoken critic.” We won't disagree with his assessment.
Here’s an excerpt::
“… Hedgeye’s Kaiser takes issue with investors’ dividend focus: ‘You need to look at other metrics because the dividend is an arbitrary number that is not representative of what the company actually earns.’
The company is expected to net 70 cents a share this year, based on generally accepted accounting principles. With a tax shield related to the MLP purchases last year, the cash earnings may top $1 a share. So Kinder Morgan’s current dividend could be about twice its cash earnings and more than three times its free cash flow, as defined by cash flow from operations, less all capital expenditures.”
Kaiser’s original short call on Kinder Morgan came on 8/2/2013 when shares traded for almost $39. Yesterday, KMI closed at $27.51 per share. In other words, the stock is down 30% since Kaiser’s call.
Contrast Kaiser’s steadfast thinking with Wall Street's perma-bulls, who are increasingly hedging their bets. In the Barron’s story, writer Andrew Bary singles out Credit Suisse MLP analyst John Edwards as a “longtime Kinder bull.”
While we wouldn’t say Mr. Edwards has swung around to our dour outlook on the stock just yet, at a minimum, he's at least pulling his expectations down from the stratosphere. Following KMI’s disappointing Q3 earnings, Edwards cut his rating on the stock to "Neutral" from "Outperform." He also lowered his price target to $39 from $52.
It's a start!
The stock was up 3.4% yesterday, rebounding from its 15% tumble after the company reported lackluster earnings.
We're obviously not buying the bounce
In a recent note to subscribers, Kaiser reiterated his short call and explained why he continues to peg fair value for KMI in the range of 9x to 10x current EV/EBITDA, or $10-$13 per share.
In other words, at least 50% downside from here.
Bottom line: Kaiser has been warning about the dangers of MLPs for a long time now. Check out this laundry list of 8 MLP short calls he's made and how they have fared here. If Kaiser is right again, it doesn’t bode well for Kinder Morgan shareholders.
***If you’d like to learn more about how you can subscribe to Kevin Kaiser’s research as well as our other institutional research, please email sales@hedgeye.com.
