Financial Market Commentary

The analysts at Sabrient had a Strong Buy recommendation on natural gas energy producer Williams Companies (ticker WMB) on Dec. 5. This rating was reduced to a Buy recommendation on Dec. 12 (report available here). Sabrient likes Williams’ price momentum and recent earnings increases. Additionally, the company has raised their annual dividend for 5 straight years, which is a strong vote of confidence regarding the sustainability of these higher earnings.

This article will take a closer look at Williams from the point of view of a fundamentals-oriented, dividend-focused investor. Our bottom-line conclusion is that Williams is inferior to alternative stocks such as Kinder-Morgan Energy Partners (KMP). The analysis below shows that KMP has stronger per share fundamentals, a higher dividend yield, a lower beta (thus a lower cost of capital), and better per-share valuation based on a discounted cash flow model. Williams’ return on capital is well below its cost of capital, which makes it a persistent value-destroyer. (Click on the link to download our one-page summary: WMB).

Below we see that WMB’s stock is up 70% in the past 2 years, handily beating rival firms like KMP and Anadarko Petroleum (APC):

The stock also outperformed the S&P 500 over the same period:

WMB’s total revenue continues recovering from its 2009 lows; the company’s profits are also recovering:

WMB’s EBITDA and EBIT display a solid uptrend since 2009:

Notice that WMB’s revenue per share remains depressed, and much lower than Kinder-Morgan’s:

The trend in WMB’s EBITDA/share is largely flat. Although KMP generates greater EBITDA/share, KMP’s EBITDA/share is in a 4-year downtrend:

While Sabrient’s analysts are correct in their assertion that WMB’s earnings have shown a nice recovery, especially compared to KMP, also notice the much higher volatility of WMB’s EPS (which explains much of the beta-differential between the two companies; WMB’s beta is 1.32, vs. only 0.37 for KMB):

While both firms managed to increase dividends each year for the past 5 years, KMP absolutely trounces WMB in terms of dividends per share:

KMP also has superior operating margins:

and net margins:

Given the trend in natural gas prices, we don’t expect margin expansion for either company any time soon:

While both stock’s dividend yields are trending downward, KMP’s yield of 5.8% is almost 3 times larger than WMB’s yield of 2.1%:

KMP is also superior in terms of return on invested capital:

and free cash flow per share:

Which explains why WMB keeps falling behind in terms of economic value-added per share:

and market value-added per share:

With small per share fundamentals and a high cost of capital due to their high beta, WMB measures up as extremely over-valued based on a discounted free cash flow model:

But KMP measures up as significantly under-valued due to their larger per share fundamentals and lower cost of capital:

Conclusion: With greater per-share fundamentals and ROIC, a stronger track record of value creation, a much higher dividend yield and a far lower beta, Kinder-Morgan Energy Partners (KMP) represents a better value for a fundamentals-oriented, dividend-focused investor than Williams Companies (WMB).

Datasource: Standard & Poor’s Capital IQ