Prediction: Energy Transfer's Stock Is Still a Buy After a Strong Start to the Year

Shares of Energy Transfer (NYSE: ET) have had a good start to the year, trading up more than 18% as of this writing. Meanwhile, the master limited partnership (MLP) just raised its full-year guidance following a strong first-quarter report.

Let's take a closer look at the company's results and why the stock still looks like a buy.

Energy Transfer management sees strong growth ahead

Energy Transfer continues to be a great combination of a high-yield stock with strong opportunities. It currently has a 6.6% yield, with plans to increase its distribution by 3% to 5%.

Image source: Getty Images.

The MLP has a robust pipeline of projects in its backlog, and it just announced it was increasing its capital expenditures (capex) this year after adding several new projects. As such, its capex budget will go from a range of $5 billion to $5.5 billion to a new range of $5.5 billion to $5.9 billion.

To put that in context, it spent $4.5 billion on growth projects last year. These are all under long-term contracts and are projected to produce mid-teen returns.

Turning to its first-quarter results, earnings before interest, taxes, depreciation, and amortization (EBITDA) surged by 20% year over year to $4.94 billion. Management said this performance was $500 million above its expectations, with about $300 million being more one-time in nature from optimization. However, it added that it has identified large-scale spread and optimization opportunities in five of the past eight years. Optimization refers to the company’s ability to leverage its massive pipeline and storage network to profit from price differences based on geography or time periods. This can be particularly effective during periods of market volatility, such as now.

Distributable cash flow to partners, which is operating cash flow minus maintenance capex, jumped 17% to $2.7 billion, up from $2.31 billion a year ago. It paid out $1.16 billion in distributions in the quarter, good for a coverage ratio of 2.3 times.

The company also significantly increased its full-year EBITDA forecast, taking it to a range of $18.2 billion to $18.6 billion. That's up from a prior forecast of $17.45 billion to $17.85 billion, and original guidance of $17.3 billion to $17.7 billion. Management also said that if some of the benefits it experienced in the first quarter continue, it should reach or exceed the high end of its new guidance.

Why the stock is still a buy

Despite its strong start to the year and robust opportunities, Energy Transfer is still one of the most attractively valued stocks in the midstream space, trading at a forward enterprise-value-to-EBITDA multiple of just 8.7. That is a big discount to fellow midstream MLPs like Enterprise Products Partners and MLPX, which both trade at 11 multiples.

With solid growth ahead and a cheap valuation, Energy Transfer is still a buy with strong upside. Its distribution is well covered, and it has the most robust project backlog in the space.

Geoffrey Seiler has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.