Enterprise Products Partners L.P. (NYSE: EPD) was the beneficiary of an analyst upgrade at Credit Suisse on Wednesday. The firm’s John Edwards raised Enterprise Products to Outperform from Neutral, and the target was raised to $78, versus a $68.80 close.
This upgrade is significant for several reasons. First is that Enterprise is the largest standalone entity in the land of master limited partnerships (MLPs). Second is that the MLP sector has been battered with concerns about lower distributions (yield equivalents). A third reason this upgrade stands out so much is because this $78 price target represents upside of more than 13%, plus that 4.1% distribution yield. Lastly, the $78 price target is only $2 shy of the street high price target, and it is more than $5 above the consensus price target.
So, what does Credit Suisse’s John Edwards see here that is above and beyond most other analysts after an analyst meeting update?
Edwards shows a 1.5 times distribution coverage at its current distribution growth trajectory, as well as an investment of three to four times the capital to sustain that growth trajectory, which should allow Enterprise to grow the distribution faster than most MLPs. He said:
We calculate Enterprise could grow its distribution at 6% annually for the next 7 years with zero capital investment just by squeezing coverage. Put another way, our Target price implies a 5.75% to 6.0% yield on Enterprise discounted cash flow per unit run rate for the fourth quarter of 2014 and a valuation range of $77 to $80 per unit for a total return of 16% to 21%.
Credit Suisse also believes that Enterprise can continue to grow its distribution by about $0.16 per unit annually, with only $1.0 billion to $1.4 billion of annual growth capital spending. The upgrade also points out that Enterprise has announced a capital growth budget of $3.6 billion to $4.1 billion for 2014, and $5.5 billion of projects under construction for 2014 to 2016.
One issue that the upgrade does cover is that Enterprise faces a management turnover this year. Fortunately, the firm feels as though Enterprise has a deep bench of talent, with personnel having decades of experience, and who have led several of Enterprise’s most important projects.
One last thing to consider is that Enterprise’s 52-week and all-time high had been $69.28. This upgrade is calling for almost $9 higher upside than that. Enterprise is indicated to be putting in new highs on Wednesday, after closing at $68.80 on Tuesday.