The 10 Best Infrastructure Stocks Today

Source: Investor Presentation

Holly reported second-quarter financial results on July 31. Distributable cash flow was $67.5 million for the quarter, an increase of $2.3 million, or 3.5% compared to the second quarter of 2018. The company saw strong volume growth in its Permian Basin operations and in the Rockies.

Holly Energy has increased its distribution to investors for 59 consecutive quarters, including a recent 1.9% increase. However, the sustainability of the distribution is a significant question for investors, as Holly reported a distribution coverage ratio of just 0.99x in the most recent quarter.

This means that the company did not generate enough distributable cash flow to cover its distribution in full last quarter. A distribution coverage ratio below 1.0x is not sustainable over the long-term, meaning the company will need to grow DCF above its distribution in the near future.

We think Holly can accomplish this. Thanks to a series of growth projects, such as a truck loading rack in Orla, Texas, we expect the MLP to grow its distributable cash flow per share by at least 4% per year over the next five years.

We expect annual DCF-per-unit growth of 4% through 2024, and the stock has a very high yield of 9.7%. We also view the stock as slightly undervalued, and that an expanding valuation multiple could boost annual returns by ~1.3% per year. Overall, we expect annual returns of 15% per year over the next five years.

Infrastructure Stock #5: Macquarie Infrastructure (MIC

  • Expected Returns: 16.2%

Macquarie is a perfect fit for this list, as it is a fund that invests in infrastructure businesses such as airport services, gas production & distribution, and bulk liquid terminals. Macquarie Infrastructure was founded in 2004, and is currently valued at $3.5 billion.

Source: Investor Presentation

Macquarie International holds a portfolio of asset-heavy businesses. Its terminals, gas distribution centers, and other businesses are relatively similar to those of many MLPs. Macquarie Infrastructure has been able to grow its cash flows considerably over the last couple of years, both on an absolute basis as well as on a per-share basis, despite the fact that the share count rose substantially. Between 2009 and 2018, the company achieved a cash flow-per-share growth rate of 11.4%.

Macquarie Infrastructure’s largest business is Atlantic Aviation, which contributes about 50% of the company’s total revenues. Atlantic Aviation provides airport services such as fueling, deicing, baggage services. It provides its services for business aircraft, military aircraft, commercial & cargo aircraft, and more.

None of Macquarie Infrastructure’s units are high-growth businesses, but all provide necessary elements of infrastructure and produce reliable cash flows. The majority of the cash flow growth in the past several years was derived through acquisitions, which were highly accretive in the past. As a result, Macquarie is optimally positioned to benefit from a major infrastructure spending plan.

Macquarie has a current dividend yield of 10%, and the stock appears to be undervalued. An expanding valuation could add approximately 4.2% to its annual returns. We also expect 2% annual growth for Macquarie, leading to total expected returns of 16.2% per year over the next five years.

Infrastructure Stock #4: Genesis Energy LP (GEL)

  • Expected Returns: 18%

Genesis is an energy infrastructure MLP. It generates roughly 42% of its operating income from offshore pipeline transportation, 36% from sodium minerals and sulfur services, 16% from onshore facilities and 6% from marine transportation. It has a market capitalization of $2.7 billion.

Source: Investor Presentation

Genesis Energy has had a difficult past few years, culminating with a 31% distribution cut in late 2017. Nevertheless, the distribution cut will probably prove to be a turning point for the stock. Thanks to the distribution cut, Genesis Energy now intends to reduce its leverage ratio from 5.1x to about 4.0x by the end of next year. Moreover, U.S. oil production has reached record levels and is expected by Energy Information Administration to keep posting new all-time highs in the upcoming years.

This growth could be accelerated by a major infrastructure spending bill, as machinery and new infrastructure would require oil. This oil boom will be prominent in the Gulf of Mexico, where Genesis Energy generates a great portion of its earnings thanks to the services it provides to deep-water oil producers. We expect 3% annual DCF growth for Genesis over the next five years.

In addition, the stock appears to be undervalued. With a price-to-EBITDA ratio below 4.0x, compared with our fair value estimate of 5.0x, the stock could see a ~5.1% annual tailwind from a rising valuation multiple.

And while investors never want to see a dividend cut, Genesis has returned to distribution growth, with five distribution hikes since the cut. Genesis has a current yield of 9.9%, leading to total expected returns of 18% per year through 2024.

Infrastructure Stock #3: MPLX LP (MPLX)

  •  Expected Returns: 19%

MPLX is an energy infrastructure company that was formed by the Marathon Petroleum Corporation (MPC) in 2012. The business operates in two segments: Logistics and Storage – which relates to crude oil and refined petroleum products – and Gathering and Processing – which relates to natural gas and natural gas liquids (NGLs). The company generated $2.7 billion in distributable cash flow in 2018

MPLX has exciting growth prospects going forward, due to its exposure to natural gas. In the last decade, natural gas has overtaken coal as the leading source of electricity generation in the U.S. Building pipelines requires years of approvals and ongoing regulation.

As such, the incumbent positions enjoy “toll-booth” type business models, with a good portion of their revenue fixed via fee-based and “take or pay” agreements. MPLX in particular has a strong position in the Marcellus/Utica region, with long-term contracts from Marathon. We are forecasting 3.5% annual DCF growth moving forward.

Plus, higher infrastructure investments in the U.S. will naturally lead to higher demand for natural resources, and MPLX is in prime position to capitalize on this increased demand.

Source: Investor Presentation

Acquisitions will further boost MPLX’s growth. On July 30th, MPLX closed on its acquisition of Andeavor Logistics LP in a unit-for-unit exchange. On a pro-forma basis, MPLX will have adjusted EBITDA of $5.3 billion and distributable cash flow of $4.1 billion per year. The combined entity will have a distribution coverage ratio of 1.4x, with a manageable leverage ratio of 4.0x and an investment-grade credit rating.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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