Earlier this month, Magellan Midstream Partners L.P. (MMP) – a master limited partnership – announced its financial results for the second quarter ended June 30, 2010. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook for the stock.
Earnings Review
On August 3, 2010, Magellan reported second-quarter 2010 results that came in significantly better than expected, buoyed by higher rates and improved demand for its transportation services.
The partnership reported earnings per unit of 86 cents (excluding mark-to-market commodity-related pricing adjustments), comfortably surpassing the Zacks Consensus Estimate of 64 cents and the year-ago profit of 45 cents.
Total revenue more than doubled year over year to $423.1 million and easily beat the Zacks Consensus Estimate of $310.0 million.
(Read our full coverage on this earnings report: Magellan Reports Surging Profits)
Agreement of Estimate Revisions
Analysts have a strong positive agreement regarding Magellan’s 2010 and 2011 outlooks. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the partnership’s second quarter earnings release.
Out of 7 analysts covering the stock, six have revised their estimates for 2010 upward, while none have gone in the opposite direction. Looking to 2011, the trend is more or less similar. Out of 13 analysts, seven hiked their estimates compared to 4 negative revisions.
This uptrend in estimate revisions reflects strong near-term financial results with the expectation that cash flows will be driven by fundamental improvement in the business. We see a consistent stream of earnings, given the strong product pipeline volumes, positive signs of economic recovery, and limited financing overhang.
However, the near-term outlook seems to be bearish as indicated by the significant number of negative revisions for the September quarter. Nine of the 10 analysts have decreased their quarterly estimates over the last 30 days, against no positive revisions.
The likelihood of additional equity offerings (to finance the partnership’s previously-announced pending acquisition of petroleum storage and pipeline assets), together with a lull in fund flows and apprehensions of lower year-over-year tariffs in the second half of 2010 contribute toward the downbeat sentiment.
Magnitude of Estimate Revisions
As a result of the analysts revising estimates over the past 30 days, the Zacks Consensus Estimates for fiscal 2010 and 2011 have both gone up by 4 cents each from $2.68 to $2.72 and from $2.88 to $2.92, respectively.
However, estimates for the September 2010 quarter are down by 10 cents, reflecting the negative bias in the estimate revisions trend on the back of the tempered outlook.
Our Recommendation
Magellan units are currently rated as Zacks #3 Rank (‘Hold’), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our long-term Neutral recommendation.
Our cautious stance on Magellan Midstream Partners takes into account the challenging operating scenario for pipeline operators. While the partnership’s liquidity position is sound and growth potential is also attractive, we continue to believe that the near- to medium-term outlook for petroleum products expenditure will stay tentative. Another concern for Magellan is the weak demand for refined products that translates into lower pipeline throughputs.
Given these headwinds, we believe that Magellan Midstream’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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