Is Brookfield Infrastructure Partners LP a Buy?

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Last year was an exceptional one for Brookfield Infrastructure Partners (NYSE: BIP). Funds from operations (FFO) rose 14% per unit, which helped fuel a nearly 34% improvement in the company's unit price. Add in a high-yielding distribution, and Brookfield's total return approached 40%, beating the market by a wide margin. That's nothing new for a company that has significantly outpaced the market and its peer group over the past decade.

While last year's performance will be tough to match in 2018, that doesn't mean Brookfield Infrastructure Partners doesn't have plenty of fuel to continue creating value for investors in the future.

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The price has changed, but the value really hasn't

Brookfield Infrastructure Partners entered 2017 trading rather cheaply, with units selling for about 12.3 times FFO and yielding 4.7%. However, even though the price of its units leaped last year, they remain inexpensively priced at just 13.2 times FFO. Meanwhile, thanks to two distribution increases, the yield has barely budged and was recently 4.6%. As those metrics suggest, Brookfield's valuation hasn't changed all that much in the past year.

In the company's view, units should trade closer to 15 times FFO and yield less than 4% because Brookfield is growing at a faster rate than similar companies. For example, most large U.S.-focused utilities have dividend yields between 2.5% and 5%, and are increasing earnings by only 4% to 8% annually. Brookfield, on the other hand, expects to organically grow FFO 6% to 9% each year, with the potential to push that rate into the double digits with the right acquisitions. That faster expected growth rate drives its view that units should trade at a higher valuation and lower yield than those of its peers, and suggests that investors who buy Brookfield Infrastructure today would be getting in at a better-than-fair price.

Plenty of growth still to come

Several factors drive Brookfield's forecast that it can grow FFO at a healthy rate in the coming years. First, many of its infrastructure businesses can raise their prices as inflation rises to boost earnings. Second, the volumes across the company's toll roads and ports tend to grow as the global economy expands, which will increase the cash flow those businesses generate. Finally, the company has roughly $2.6 billion of expansion projects under way across its portfolio, which should also provide an incremental earnings boost in the coming years.

That said, Brookfield has historically increased earnings at a double-digit pace, with FFO per unit expanding at a 21% compound annual rate over the past decade thanks to needle-moving acquisitions. While Brookfield only has one small deal in the pipeline at the moment, it's actively pursuing additional transactions to expand its existing platforms. It also sees several exciting areas that could drive growth, including water. While it will take the company time to find the right deals, future transactions could move the needle as those in the past have.

But even without an acquisition, Brookfield's organic growth initiatives should enable the company to increase its high-yielding payout at a 5% to 9% annual rate. That rising income stream alone has the potential to grow investor wealth at a double-digit annual rate in the coming years.

Several ways to win

While Brookfield Infrastructure Partners' unit price skyrocketed last year, that didn't quite eliminate the company's valuation discount. That's why units could have further to run as Brookfield continues narrowing that gap. Even if the multiple stays the same, investors could still make plenty of money thanks to the organic growth ahead, which should boost Brookfield's earnings and bountiful distribution. That organic growth alone could fuel total annual returns in the mid-teens. Add in some acquisition-fueled upside and Brookfield could continue delivering market-smashing returns.

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Matthew DiLallo owns shares of Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.