1 Ridiculously Cheap High-Yield Stock Worth Watching
Units of Summit Midstream Partners (NYSE: SMLP) have tumbled more than 50% in the past year due to concerns about its financial profile. Not only was the master limited partnership (MLP) paying out an uncomfortably high percentage of its cash flow to investors, but it had some future liabilities on its balance sheet that it wasn't sure how it would address.
The midstream company has since taken several steps toward fixing its issues. Those moves, however, have yet to lift the weight holding down the company's valuation. Because of that, Summit Midstream trades at a ridiculously cheap price, which makes it an intriguing high-upside opportunity to watch.
Making all the right moves
Summit Midstream finally buckled under the weight of its weak financial profile this past February. The MLP sold a noncore asset for $90 million, which gave it some cash to repay a portion of an obligation to its parent from a prior acquisition. In addition, the company reached a deal to eliminate the costly management fees it had been paying its parent. Finally, Summit slashed its distribution to investors by 50%. These moves will enable the company to retain about $85 million in annual cash flow, which it can use to repay debt and fund expansion projects.
As a result, Summit Midstream has significantly improved its financial profile. The MLP can now cover its distribution -- which still has a jaw-droppingly high yield of 16.7% even after the 50% cut earlier this year -- by a comfortable 1.75 to 1.95 times. Meanwhile, the company expects to end the year with a leverage ratio of 4.3 times debt to EBITDA, which is only slightly above the peer-group average of 4.1 times.
A bottom-of-the-barrel valuation
Despite all the progress, Summit Midstream's market valuation has continued declining this year, with its unit price falling by more than a third since announcing those moves. Because of that, the MLP trades at a ridiculously cheap valuation compared to its peers.
Summit Midstream currently expects to produce between $295 million and $315 million in adjusted EBITDA this year. Given the company's current enterprise value of $1.8 billion, it implies that Summit trades at just six times earnings. For comparison's sake, Summit's peers trade at an average multiple of 10 times EBITDA.
On the one hand, Summit Midstream should sell for a lower valuation since it still has some issues to address. Namely, the midstream company owes its parent a $303.5 million cash payment next year to retire its IOU from a previous acquisition. The company might need to sell more assets, or dilute investors by issuing new units, to fund that payment, which is a concern.Also, its leverage ratio remains elevated, which limits its ability to invest in expansion projects.
However, the market seems to have priced Summit Midstream as if its earnings are in a state of decline, which isn't the case. While they only rose slightly more than 1% in 2018, they're on track to increase 7% this year even with the negative impact of the asset sale. That lines up well with the peer-group average growth rate of 8%. In the meantime, Summit has a couple of compelling expansion projects in development that could drive healthy future growth, including a large-scale natural gas pipeline that it's developing with ExxonMobil. While it's unclear how the company will finance that pipeline, it's working on strategies to minimize its initial cash outlay so that it can maintain a solid financial profile.
Compelling enough to watch closely
While Summit Midstream has made several moves to shore up its financials this year, it still has a few hurdles to overcome, which continue to weigh on its valuation. However, its unit price has fallen to such depths that it trades at an absurdly low level. Thus, this MLP could have big-time upside if it can find a good solution to address its remaining concerns, which is why investors might want to put this high-yield stock on their watchlist.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.