Is it time to invest in enterprise product partner shares as it looks set to accelerate growth?

One of the most consistent companies in the mid-market sector, Enterprise Product Partners (EPD 0.56%)seeks to increase its spending on growth projects as it begins to see greater opportunities for implementation of projects. At the same time, pipeline operator continues to perform well with strong third quarter results.

The stock has a very attractive allocation with a yield of 7.2%. forward yield. Let’s dive into the company’s third-quarter results and see if now is a good time to buy the stock as it looks to accelerate growth.

Sequence model

With a stable, fee-based business model, Enterprise doesn’t tend to give investors too many surprises, which is a good thing. This trend continued last quarter as the company posted strong growth.

In the third quarter, Enterprise’s overall gross operating income rose 5% to $2.45 billion. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) also rose 5% to nearly $2.44 billion.

Distributable cash flow (DCF) was $1.96 billion, an increase of 5%. However, adjusted free cash flow was $943 million. DCF is similar to free cash flow, except that operating cash flow is reduced only by maintenance capital expenditures (capital investments), rather than capital expenditures for growth. As the company allocated more cash to growth projects, its adjusted free cash flow declined compared to last year.

Based on DCF, Enterprise’s distribution coverage ratio was 1.7x. The company ended the quarter with 3x leverage, which it defines as net debt adjusted for equity leverage in junior subordinated notes (hybrids) divided by adjusted EBITDA.

At the end of the day, all these fancy acronyms show that Enterprise generates a lot of cash flow, which it directs towards its distribution and growth projects, while keeping its debt levels at acceptable and manageable levels. Free cash flow will likely decline as more of that cash flow is allocated to growth and the company has begun spending a little more on distribution and capex than it generates operating cash flow.

While it’s worth keeping an eye on, Enterprise’s balance sheet is one of the best in the mid-market, and its distribution has been growing for 26 straight years. There’s nothing in Enterprise’s history to suggest it will spend money recklessly, but it will take advantage of attractive projects when it sees them and has strengthened its balance sheet to do just that.

In terms of distribution, it currently stands at $0.525 per quarter, up 5% from a year ago. I expect Enterprise to continue to increase this in the coming years.

Growth Projects

Having abandoned growth projects coming out of the pandemic, Enterprise has begun ramping up its spending. It plans to spend between $3.5 billion and $3.75 billion on growth projects this year. That’s up from 2022 spending of just $1.6 billion.

The company will also further increase growth capital expenditures next year, in part due to its recent acquisition of Pinon Midstream, with plans to spend between $3.5 billion and $4 billion. That’s up from the previous forecast of $3.25 billion to $3.75 billion.

Enterprise currently has $6.9 billion worth of projects under construction. Many of these projects will not come online until the second half of 2025, and some until 2026. It notes that over the past decade they have delivered about a 12% return on invested capital. This means that if the company spends $4 billion on growth projects, it should ultimately result in an additional annual gross operating profit of approximately $480 million.

Enterprise said it is one of the few mid-market companies with assets that will benefit from increased natural demand from data center construction and increased energy consumption from artificial intelligence. While the company couldn’t quantify the opportunity, it said it’s one of the best signals it’s seen in the natural gas space in a long time.

After the current period of excessive spending on growth projects, Enterprise expects to return to the lower range.

Attractive valuation

One of the most common ways investors value mid-market companies is by using enterprise valueEBITDA ratio (EV/EBITDA). This is because building long-term pipelines and other processing facilities is a capital-intensive business. This metric takes into account the debt companies take on on these projects while eliminating non-cash depreciation costs that are spread over the life of these assets. Using EV/EBITDA, the costs of these projects are reflected in its net debt, and EBITDA gives investors a better idea of ​​the company’s current operating profitability.

On that front, Enterprise shares trade at 9.5 times EV/EBITDA, based on analyst estimates for 2024. This is significantly below the multiple at which the stock traded pre-pandemic, and significantly below what the mid-market industry as a whole has traded at in the past. Between 2011 and 2016, the average flow limited liability partnerships (MLP)traded at an average EV/EBITDA multiple of 13.7 times.

EPD EV to EBITDA (forward) data on YCharts.

With Enterprise seeing some of its best growth opportunities in a long time, now seems like a good time to buy shares. Investors are getting a stock yielding over 7% from a company with a history of sequentially increasing its distribution, trading at a historically low valuation and poised for strong growth.