Investment bank UBS recently adjusted its price target on midstream giant Energy Transfer(NYSE: ET). While it trimmed the target from $23 per unit to $22, it maintained its buy rating. That slightly lowered price target still implies that the master limited partnership (MLP) has a massive upside. The revised target is more than 50% above the current unit price.
The investment bank made the tweak following Energy Transfer's fourth-quarter earnings report. Energy Transfer set several quarterly operational records and expects strong earnings growth in 2024. Here's a look at whether the MLP has the fuel to rally more than 50% this year.
A bottom-of-the-barrel valuation
Energy Transfer is coming off a strong year in 2023. Its earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 5% last year to $13.7 billion. That was $100 million higher than the top end of its guidance range. It puts the MLP's valuation at around 8 times its EBITDA, near the bottom of its peer group:
Image source: Energy Transfer.
There's no discernable reason for its discounted valuation. Energy Transfer is growing at a solid rate (it expects its adjusted EBITDA to rise by around 7% at the midpoint of its 2024 guidance range). It also has a much-improved balance sheet (it sees its leverage ratio in the lower half of its 4.0-4.5 times target range this year). Those factors fuel its expectation of increasing its already high-yielding distribution (currently 8.7%) by 3% to 5% annually.
The fuel to potentially produce high-octane total returns
Given Energy Transfer's discounted valuation, the $22 price target seems attainable since that would put its valuation closer to its peers. Add its growing distribution to its upside potential, and Energy Transfer could produce high-octane total returns from here. That makes it a compelling investment opportunity for those seeking strong income and price appreciation potential.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
