The stock market is trying to climb back to even on the year after a brief bump of a sell-off in January. We all know the exciting stories that have been driving gains for the past few weeks as stocks like Facebook (FB) and Tesla (TSLA) have regained momentum and are surging higher. As a value guy who believes that corporations have actual value and stock ownership represents more than a betting slip in the world's longest-running popularity contest, I cannot fathom owning those shares, but I'll save that story for another day. I'm more interested in stocks that have been creamed so far this year, fallen below asset value and might now be bargains with superior long-term potential.
Boardwalk Pipeline Partners (BWP) has seen its shares absolutely blow up so far in 2014. The Master Limited Partnership's stock is down 48% this year after slashing its dividend by about 80%. An increase in production from the U.S. natural gas industry has caused prices to fall. It doesn't look like business conditions will improve anytime soon. Chief Executive Officer Stanley Horton said recently on a conference call, "Because our transportation and storage revenues are continuing to face substantial market headwinds, we do not perceive these conditions changing appreciably over the next 12 to 24 months." The dividend cut caught yield chasers by surprise and they have exited the stock in droves, driving the shares down to just 80% of book value.
There are headwinds for the company, and there's a good chance it is just the first of the pipeline-and-storage MLPs to cut its payout. But the company has an ace up its sleeve in the form of the majority ownership of Loews Corp. (L), the conglomerate managed by the Tisch family. Rather than taking on more debt or issuing new shares, Boardwalk has obtained financing directly from its parent company on favorable terms and operations will not miss a beat. The Tisches are patient and intelligent investors who see the bigger picture and are unlikely to do anything rash in response to the current weakness in the business. Some have speculated they may sell the pipeline partnership, but it will be on terms favorable to themselves.
Business conditions may not be perfect, but this company has some valuable assets. It owns 14,410 miles of natural gas and liquids pipelines and underground storage caverns with an aggregate working gas capacity of approximately 201 billion cubic feet and liquids capacity of approximately 18 million barrels. Its pipelines originate in Gulf Coast region, Oklahoma and Arkansas and extend north and east to Tennessee, Kentucky, Illinois, Indiana and Ohio. Pipelines are not easy to build these days, so existing networks become all the more valuable.
Wall Street analysts usually flee from falling angels like Boardwalk, but instead they are praising Loews for taking the most financially conservative approach to dealing with the slowdown. Analysts at Morgan Stanley were quoted in a recent Barron's article:
"With a weaker outlook, the company had two choices -- moderately cut the distribution and risk funding growth capital projects -- in part -- with dilutive equity offerings (given the likelihood of a lower unit price), or very substantially reduce the quarterly distribution rate, but be able to fund the capital plan internally. Loews, as the quintessential long-term holder, chose the latter course of action, although this obviously has had a significant near term negative impact on unit price. Over the long-term, we believe that [Loews] has made the better choice, preserving maximum value."
I agree with the analysts for a change. The company has assets that are close to irreplaceable, deep-pocketed and patient majority owners and time on its side. The demand for natural gas will inevitably increase over the next decade and business conditions will eventually improve. At 80% of book value, the stock is too cheap not to own.
There's a lot of junk on 2014's list of falling stocks. J.C. Penney (JCP) makes the cut with the stock already down 34% this year, but I have no interest. There isn't an adequate margin of safety, no matter how cheap the stock may be. And Rent-A-Center (RCII) is intriguing with its stock down 25% but not yet at a sufficient discount to tangible book value. But Boardwalk Pipeline stands out as a gem and a bargain issue, with a margin of safety and solid upside.
