Wednesday 13 November 2013

Analysis of TC PipeLines

An American gas pipeline company

Company: TC PipeLines

Business: An American company that fully or partially owns six gas pipelines that are critical for the American energy infrastructure. These gas pipelines have the capacity to transport 8.9 billion cubic feet (= 0.25 billion cubic meters) per day. The company was created and is owned to around 28% by TransCanada Corporation that besides from owning pipelines in Canada also have gas storage and power plants.

Active: TC PipeLines are in principle only active in the US. Sometimes they join on some deal in Canada with the mother company.

P/E: 21.3

Comment: Ugh! became much tougher then what I expected due to that they favour to only report their net earnings but I want to have also the revenue to see their growth in the last five years. So I had to calculate their revenue part from the different pipelines. I hope I made no mistake but please check it to be sure.

This company was analysed due to a request that can be found here.

contrarian values of P/E, P/B, ROE as well as dividend
The P/E of TC PipeLines is far too high with 21.3 and the P/B is also of no interest since it is running at 2.3 which means that according to Graham it is a no go! The earnings to sales are however very nice with 44% which is mainly due to that they have very low costs. They produce nothing, they build nothing, they only pass gas along pipes and make sure those pipes are maintained in mint condition. The ROE which is 10.8% is barely becoming an ok. The book to debt is however ok with a ratio of 1.8. In the last five years they have had a yearly negative growth of -0.1% which gives us a motivated P/E of around 8 to 10 which means that today the shares are highly overvalued by the market. I guess one reason for this overvaluation could be that they pay a very nice dividend of 6.8% which is very unusual for American companies today that are fair or overvalued however this represents 145% of their earnings and 2012 was the second time in a row that they were paying out more in dividends then what they earned.

Conclusion: Neither Graham or I look up TC PipeLines as a good company to invest in today. The P/E, P/B and ROE is far from ideal and the dividends is a danger. Either they have to start making more money (and we talk here about 50% more!) or they will be forced to decrease the dividend to a more reasonable level. If the dividend is decreased I would not be surprised if the shares would drop significantly. So I would definitely not invest in TC PipeLines today but there is a potential opening coming.

If this analysis is outdated then you can request a new one.

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