Tom's Life Bits

User Tools

Site Tools

Trace: • water_vapor_pressure_project_notes • box_002 • aprs_telemetry_info_dec_2009 • 2010_in_review • libbie_sw_jan2009_trip • 2020_in_review • 2008_in_review • road_to_grace_synopsis • arlene_s_eulogy • life_journal
info:mlp_enchilata_part_one

Differences

This shows you the differences between two versions of the page.

Link to this comparison view

Both sides previous revisionPrevious revision
Next revision		Previous revision
info:mlp_enchilata_part_one [2008/06/09 02:57] – tomgeeinfo:mlp_enchilata_part_one [2008/06/09 04:52] (current) – tomgee
Line 17: Line 17:
 {{info:mlp_part4.jpg|}} {{info:mlp_part4.jpg|}}
 {{info:mlp_part4b.jpg|}} {{info:mlp_part4b.jpg|}}
 +
  
 ==== Enchilada part five ==== ==== Enchilada part five ====
Line 41: Line 42:
  
 Enchilada part seven - the very long explanation Enchilada part seven - the very long explanation
-The Whole enchilada part seven - a fictionalized narrative and an introduction to rocket science+==== The Whole enchilada part seven ==== 
 +  
 +- a fictionalized narrative and an introduction to rocket science
  
 The other day my neighbor dropped by to ask questions about some of the spreadsheets I had posted on the IV board, and on other spreadsheets done by the brokerages or done by me and not recently shared with the good folks at IV. And he was complaining that 'there are just too many dang numbers. There is [1] EPS - and [2] the trend in EPS growth. There is [3] DCF [distributable cash flow] estimates and [4] DCF growth trends. There are [5] CAGRs - and some of those CAGRs look kinda flakey. There are [6] distributions and [7] trends in distribution growth." [And we will temporarily ignore some of the other numbers he listed - like ratings and target prices.] "It's sort of like juggling every time I have to make an investment decision. And just like juggling, I can handle two balls and sometimes three - but when you get to that fourth ball - the balls (or in this case the spreadsheets) start going every which way - and I just get flustered. And that is just with analyzing ONE MLP. When you start to compare two MLP’s against each other - that adds up to fourteen dang balls in the air at once. There has got to be a simpler way!" The other day my neighbor dropped by to ask questions about some of the spreadsheets I had posted on the IV board, and on other spreadsheets done by the brokerages or done by me and not recently shared with the good folks at IV. And he was complaining that 'there are just too many dang numbers. There is [1] EPS - and [2] the trend in EPS growth. There is [3] DCF [distributable cash flow] estimates and [4] DCF growth trends. There are [5] CAGRs - and some of those CAGRs look kinda flakey. There are [6] distributions and [7] trends in distribution growth." [And we will temporarily ignore some of the other numbers he listed - like ratings and target prices.] "It's sort of like juggling every time I have to make an investment decision. And just like juggling, I can handle two balls and sometimes three - but when you get to that fourth ball - the balls (or in this case the spreadsheets) start going every which way - and I just get flustered. And that is just with analyzing ONE MLP. When you start to compare two MLP’s against each other - that adds up to fourteen dang balls in the air at once. There has got to be a simpler way!"
Line 66: Line 69:
 But, I said, "we are not really making model prices - we are making combo balls." We are going to make combo balls using CAGRs and DCFs - but before we do, let’s look at some real world examples - all with stocks that have close to $2.00/unit EPS estimates in 2008. Let's see how they fit with the modeled prices - and let's see if the modeled prices might make more sense than the actual prices. But, I said, "we are not really making model prices - we are making combo balls." We are going to make combo balls using CAGRs and DCFs - but before we do, let’s look at some real world examples - all with stocks that have close to $2.00/unit EPS estimates in 2008. Let's see how they fit with the modeled prices - and let's see if the modeled prices might make more sense than the actual prices.
  
-BWP's 2008 EPS estimate is $1.92. BWP closed on 1-04 at $31.00 and has a CAGR estimate of 9.0%. +BWP's 2008 EPS estimate is $1.92. BWP closed on 1-04 at $31.00 and has a CAGR estimate of 9.0%.\\ 
-DPM's 2008 EPS estimate is $1.95. DPM closed on 1-04 at $42.32 and has a CAGR estimate of 10.0%. +DPM's 2008 EPS estimate is $1.95. DPM closed on 1-04 at $42.32 and has a CAGR estimate of 10.0%.\\ 
-HLND's 2008 EPS estimate is $2.12. HLND closed on 1-04 at $48.70 and has a CAGR estimate of 10.5%. +HLND's 2008 EPS estimate is $2.12. HLND closed on 1-04 at $48.70 and has a CAGR estimate of 10.5%.\\ 
-KMP's 2008 EPS estimate is $2.05. KMP closed on 1-04 at $55.21 and has a CAGR estimate of 8.0%. +KMP's 2008 EPS estimate is $2.05. KMP closed on 1-04 at $55.21 and has a CAGR estimate of 8.0%.\\ 
-TLP's 2008 EPS estimate is $1.89. TLP closed on 1-04 at $30.50 and has a CAGR estimate of 10.2%. +TLP's 2008 EPS estimate is $1.89. TLP closed on 1-04 at $30.50 and has a CAGR estimate of 10.2%.\\ 
-TPP's 2008 EPS estimate is $2.03. TPP closed on 1-04 at $39.22 and has a CAGR estimate of 4.0%.+TPP's 2008 EPS estimate is $2.03. TPP closed on 1-04 at $39.22 and has a CAGR estimate of 4.0%.\\
  
 All five have EPS estimates within 6% of $2.00 - but with prices that range from a low of $30.50 to $55.21. That is a low range of variation from the $2.00 EPS estimate - and a very wide range of variation in price. Let's quick do the calculation of a modeled price at a logical P/E ratio and see a different look at the price variations. All five have EPS estimates within 6% of $2.00 - but with prices that range from a low of $30.50 to $55.21. That is a low range of variation from the $2.00 EPS estimate - and a very wide range of variation in price. Let's quick do the calculation of a modeled price at a logical P/E ratio and see a different look at the price variations.
  
-BWP's modeled price is $40.32 vs. a closing on 1-04 of $31.00 - a 40.32% discount. +BWP's modeled price is $40.32 vs. a closing on 1-04 of $31.00 - a 40.32% discount.\\ 
-DPM's modeled price is $42.90 vs. a closing on 1-04 of $42.32 - a 1.37% discount. +DPM's modeled price is $42.90 vs. a closing on 1-04 of $42.32 - a 1.37% discount.\\ 
-HLND's modeled price is $47.70 vs. a closing on 1-04 of $48.70 - a 2.05% premium. +HLND's modeled price is $47.70 vs. a closing on 1-04 of $48.70 - a 2.05% premium.\\ 
-KMP's modeled price is $41.00 vs. a closing on 1-04 of $55.21 - a 25.74% premium. +KMP's modeled price is $41.00 vs. a closing on 1-04 of $55.21 - a 25.74% premium.\\ 
-TLP's modeled price is $41.96 vs. a closing on 1-04 of $30.50 - a 37.57% discount. +TLP's modeled price is $41.96 vs. a closing on 1-04 of $30.50 - a 37.57% discount.\\ 
-TPP's modeled price is $32.48 vs. a closing on 1-04 of $39.22 - a 17.19% premium.+TPP's modeled price is $32.48 vs. a closing on 1-04 of $39.22 - a 17.19% premium.\\
  
 My neighbor said "Hmmm . . so what?" I told him that we are just getting started. EPS is only one metric or model - and we need more than that to judge the fairness or appropriateness of the current prices My neighbor said "Hmmm . . so what?" I told him that we are just getting started. EPS is only one metric or model - and we need more than that to judge the fairness or appropriateness of the current prices
Line 86: Line 89:
 Using the same process as used with EPS, we created combo balls of CAGRs and DCFs. That produced the following data: Using the same process as used with EPS, we created combo balls of CAGRs and DCFs. That produced the following data:
  
-BWP's modeled price is $33.75 vs. a closing on 1-04 of $31.00 - an 8.87% discount. +BWP's modeled price is $33.75 vs. a closing on 1-04 of $31.00 - an 8.87% discount.\\ 
-DPM's modeled price is $45.72 vs. a closing on 1-04 of $42.32 - an 8.04% discount. +DPM's modeled price is $45.72 vs. a closing on 1-04 of $42.32 - an 8.04% discount.\\ 
-HLND's modeled price is $67.56 vs. a closing on 1-04 of $48.70 - a 38.72% discount. +HLND's modeled price is $67.56 vs. a closing on 1-04 of $48.70 - a 38.72% discount.\\ 
-KMP's modeled price is $50.41 vs. a closing on 1-04 of $55.21 - an 8.69% premium. +KMP's modeled price is $50.41 vs. a closing on 1-04 of $55.21 - an 8.69% premium.\\ 
-TLP's modeled price is $42.48 vs. a closing on 1-04 of $30.50 - a 39.30% discount. +TLP's modeled price is $42.48 vs. a closing on 1-04 of $30.50 - a 39.30% discount.\\ 
-TPP's modeled price is $28.75 vs. a closing on 1-04 of $39.22 - a 26.70% premium.+TPP's modeled price is $28.75 vs. a closing on 1-04 of $39.22 - a 26.70% premium.\\
  
 Through a different process, we created via the DDM [you will Google that later if you need to] a combo ball of the current distribution and the CAGR. So, my neighbor asked, "what do we do with these model prices?" "We test them" I said. What good are model prices if they are not predictive! "You mean they may NOT be predictive?" he said. I explained that they are far from being a sure thing. The EPS estimates will go up and down during the year - and the same for the DCF estimates. This will mess up or change the model prices. This is going to happen somewhat randomly. Will these random changes make the projections in the model prices garbage - or will they still be useable? And to test the models, we use historical data. Through a different process, we created via the DDM [you will Google that later if you need to] a combo ball of the current distribution and the CAGR. So, my neighbor asked, "what do we do with these model prices?" "We test them" I said. What good are model prices if they are not predictive! "You mean they may NOT be predictive?" he said. I explained that they are far from being a sure thing. The EPS estimates will go up and down during the year - and the same for the DCF estimates. This will mess up or change the model prices. This is going to happen somewhat randomly. Will these random changes make the projections in the model prices garbage - or will they still be useable? And to test the models, we use historical data.
Line 97: Line 100:
 We looked the EPS combo balls first, using the EPS estimates that existed in January of 2007. It would be cheating using the current estimates. We looked the EPS combo balls first, using the EPS estimates that existed in January of 2007. It would be cheating using the current estimates.
  
-The following companies had logical P/E valuations that were more than 10% above the 2007 beginning price: CPNO, ETP, GEL, MMP, MWE, TCLP and WPZ. Their mean price gain for the year is 9.95%. Their mean total return for the year is 15.99% - and 4 of the 7 beat the sector median yearly price gain [3.47%]. +The following companies had logical P/E valuations that were more than 10% above the 2007 beginning price: \\ 
-   The following companies had logical P/E valuations of less than 10% above the 2007 beginning price : APL, BPL, BWP, DEP, DPM, EEP, EPD, EROC, HEP, HLND, KMP, NGLS, NS, OKS, PAA, RGNC, SXL, TLP, TPP, EXLP, XTEX, KSP, MMLP, TGP and USS. Their mean price gain for the year is 1.66%. Their mean total return for the year is 8.2% - and 9 of the 25 beat the sector median yearly price gain.+CPNO, ETP, GEL, MMP, MWE, TCLP and WPZ. Their mean price gain for the year is 9.95%. Their mean total return for the year is 15.99% - and 4 of the 7 beat the sector median yearly price gain [3.47%]. 
 + 
 +The following companies had logical P/E valuations of less than 10% above the 2007 beginning price : APL, BPL, BWP, DEP, DPM, EEP, EPD, EROC, HEP, HLND, KMP, NGLS, NS, OKS, PAA, RGNC, SXL, TLP, TPP, EXLP, XTEX, KSP, MMLP, TGP and USS. Their mean price gain for the year is 1.66%. Their mean total return for the year is 8.2% - and 9 of the 25 beat the sector median yearly price gain.
  
 My neighbor said lets looks at the group with the 10% discount [CPNO, ETP, GEL, MMP, MWE, TCLP and WPZ] - which of those did not beat sector average and why did they not beat the average - if the model is so predictable? OK. The three that had less than sector average years were ETP, TCLP and WPZ. ETP got in trouble with FERC - hurting its forward outlook. WPZ had a falling DCF estimate. And TCLP, despite having 10% distribution growth in 2007, has only had 3.74% average annual distribution growth since 2001. So it is currently a mid-growth MLP that the market prices as a slow growth MLP due to that history. TCLP ended 2007 yielding 7.29% in a sector where the average yield was 6.37%. My neighbor said lets looks at the group with the 10% discount [CPNO, ETP, GEL, MMP, MWE, TCLP and WPZ] - which of those did not beat sector average and why did they not beat the average - if the model is so predictable? OK. The three that had less than sector average years were ETP, TCLP and WPZ. ETP got in trouble with FERC - hurting its forward outlook. WPZ had a falling DCF estimate. And TCLP, despite having 10% distribution growth in 2007, has only had 3.74% average annual distribution growth since 2001. So it is currently a mid-growth MLP that the market prices as a slow growth MLP due to that history. TCLP ended 2007 yielding 7.29% in a sector where the average yield was 6.37%.
Line 109: Line 114:
  
 The following companies had logical P/E valuations that were more than 10% above the 2006 beginning price: BPL, BWP, CPNO, ETP, HLND, MMP, OKS, PAA, SXL, TCLP and MMLP. Their mean price gain for the year is 35.86%. Their mean total return for the year is 43.28% - and 7 of the 11 beat the sector average yearly price gain [23.14%]. The following companies had logical P/E valuations that were more than 10% above the 2006 beginning price: BPL, BWP, CPNO, ETP, HLND, MMP, OKS, PAA, SXL, TCLP and MMLP. Their mean price gain for the year is 35.86%. Their mean total return for the year is 43.28% - and 7 of the 11 beat the sector average yearly price gain [23.14%].
-   The following companies had logical P/E valuations of less than 10% above the 2006 beginning price: APL, EEP, EPD, HEP, KMP, MWE, RGNC, TLP, TPP, VLI, WPZ, XTEX, KSP, TGP and USS. Their mean price gain for the year is 13.82%. Their mean total return for the year is 20.76% - and 3 of the 15 beat the sector average yearly price gain.+ 
 +The following companies had logical P/E valuations of less than 10% above the 2006 beginning price: APL, EEP, EPD, HEP, KMP, MWE, RGNC, TLP, TPP, VLI, WPZ, XTEX, KSP, TGP and USS. Their mean price gain for the year is 13.82%. Their mean total return for the year is 20.76% - and 3 of the 15 beat the sector average yearly price gain.
  
 So choosing from the 'menu' of the highly discounted MLPs netted an average total return that was TWICE the sector average return. I would call that pretty dang predictive. He asked if I had the numbers on the DCFs. I did - and I showed them those. He asked if I had the numbers on the DDM model. I did - and I showed them those. I then explained that I also calculated a four model average - and number that combines the valuations for the EPS model, the CAGR model, the DDM model, plus the current price, and so one has a single number to compare to the current price to see if there is a discount. It is logical that if each of the predictive models is in fact predictive, then it is logical that the average of those four models would also be predictive. So choosing from the 'menu' of the highly discounted MLPs netted an average total return that was TWICE the sector average return. I would call that pretty dang predictive. He asked if I had the numbers on the DCFs. I did - and I showed them those. He asked if I had the numbers on the DDM model. I did - and I showed them those. I then explained that I also calculated a four model average - and number that combines the valuations for the EPS model, the CAGR model, the DDM model, plus the current price, and so one has a single number to compare to the current price to see if there is a discount. It is logical that if each of the predictive models is in fact predictive, then it is logical that the average of those four models would also be predictive.
Line 115: Line 121:
 Now, let's go back and look at the DCF projection for BWP, DPM, KMP, TLP and TPP once again. [Reposting that data] Now, let's go back and look at the DCF projection for BWP, DPM, KMP, TLP and TPP once again. [Reposting that data]
  
-BWP's modeled price is $33.75 vs. closing on 1-04 of $31.00 - an 8.87% discount. +BWP's modeled price is $33.75 vs. closing on 1-04 of $31.00 - an 8.87% discount.\\ 
-DPM's modeled price is $45.72 vs. closing on 1-04 of $42.32 - an 8.04% discount. +DPM's modeled price is $45.72 vs. closing on 1-04 of $42.32 - an 8.04% discount.\\ 
-HLND's modeled price is $67.56 vs. closing on 1-04 of $48.70 - a 38.72% discount. +HLND's modeled price is $67.56 vs. closing on 1-04 of $48.70 - a 38.72% discount.\\ 
-KMP's modeled price is $50.41 vs. closing on 1-04 of $55.21 - an 8.69% premium. +KMP's modeled price is $50.41 vs. closing on 1-04 of $55.21 - an 8.69% premium.\\ 
-TLP's modeled price is $42.48 vs. closing on 1-04 of $30.50 - a 39.30% discount. +TLP's modeled price is $42.48 vs. closing on 1-04 of $30.50 - a 39.30% discount.\\ 
-TPP's modeled price is $28.75 vs. closing on 1-04 of $39.22 - a 26.70% premium.+TPP's modeled price is $28.75 vs. closing on 1-04 of $39.22 - a 26.70% premium.\\
  
 My neighbor asked "so if I were buying an MLP today, the odds are saying that I am better off buying HLND and TLP at their huge valuation discounts to the current price - and I should be reluctant to buy TPP and KMP?" My neighbor asked "so if I were buying an MLP today, the odds are saying that I am better off buying HLND and TLP at their huge valuation discounts to the current price - and I should be reluctant to buy TPP and KMP?"
info/mlp_enchilata_part_one.1212994635.txt.gz · Last modified: 2008/06/09 02:57 by tomgee