Say your 16-year-old son grew 3 inches this year and now stands at 5 feet, 8 inches. You probably wouldn't assume that he will grow 3 inches every year, which would make him 6-feet, 8 inches tall by the time he turns 20. You understand that people have growth spurts.
Yet investors often make the mistake of extrapolating a company's growth spurt far into the future. I think this is happening with Access Midstream Partners (ACMP). At the moment, it's the most popular stock on Wall Street, boasting 13 analyst recommendations and no dissenting votes.
Access Midstream gathers natural gas from producing sites, compresses it, and transports it to hubs where it goes into long-distance pipelines. The Oklahoma City-based company serves more than 5,000 wells, mostly in Oklahoma, Arkansas and Kansas. This number will soon swell to more than 8,000 wells, thanks to the acquisition of assets from Chesapeake Energy (CHK).
The gas gathering business is going well right now. Analysts look for Access Midstream to earn $1.79 a share this year, up 27% from the estimated 2012 level.
But like a teenager's growth, that 27% jump this year -- assuming it even happens -- isn't replicable. The early betting on 2014 growth is in the 7% range. And in 2012, it appears there was no growth at all, or precious little.
Access Midstream management may be capable, but they are not miracle workers. Given a realistic look at longer-range prospects, the stock seems fully valued after a 31% advance in the past six months.
Yet, the stock does have some very real positives. The dividend yield is a nice 4.8%. The company's revenue is growing fast. The number of attractive income-oriented investments around for investors to choose from is limited at the moment, given that bonds look like an unwise choice. CEO Michael Stice and Chairman David Daberko recently bought more than $500,000 of their own company's stock.
But the positives are already in the stock price. The potential negatives, in my view, are not. The balance sheet here is not strong. Standard & Poor's gives the company's debt a BB rating. That is investment grade, but the lowest of five levels within the investment grade category.
As a master limited partnership (MLP), Access Midstream must distribute almost all of its income to shareholders, which means that it doesn't have spare cash around to fund new initiatives. For that it must rely on new stock or bond offerings, which could be dilutive. MLPs have been a popular corner of the market lately, but that may not always be true.
The stock's most serious negative point is its valuation, which by almost any measure, is expensive. The partnership units are selling for 25x earnings, 16x cash flow, and 277x free cash flow. Trading at more than 8x revenue, it is also expensive relative to revenue per share.
Can 13 of Wall Street's finest be wrong? Well, it's happened before.