Tuesday, June 16, 2015

Kinder Morgan Inc.

Shares of KMI have been trading weakly over the past few weeks, seemingly in accordance with the announcement of the Fed's expectations to raise interest rates. The fear of rising interest rates has tempted investors to get rid of their high-yield equity investments, such as Kinder Morgan. This sell-off really doesn't make sense because long-term investors should be excited about the prospect of higher future rates. Once the commotion surrounding this hike seems to settle, Kinder Morgan should be at a price that will present investors with a golden buying opportunity. Secondly, shares have been trading down due to a couple bearish articles negatively impacting investor sentiment towards the company. Nothing has changed with Kinder Morgan as far as the investment thesis goes, and there is no doubt that KMI will generate substantial excess coverage to cover its dividend distributions at year end. Kinder Morgan's cash flows are highly predictable and of low risk. A problem that some investors have is with the $40B in debt on the company's balance sheet. I contend that KMI is definitely not over-levered since the company's equity value currently stands at $84B. In response to the recent slide I am lowering my price target to $46.19, which represents a ~17% upside from yesterday's $39.46 close. I would suggest doubling down on our position if KMI drops below $38 because I believe investors have overreacted to the news about interest rate hikes, along with the fact that the Street has their price target for the stock sitting at $47.50. -Eric Cohen

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