Enbridge, the leading energy infrastructure solutions player in North America, has displayed remarkable resilience despite facing uncertainties surrounding its Mainline pipeline volume and a recent court ruling on Line 5. Despite these challenges, Enbridge has maintained a positive growth trajectory. While its price action and valuation have factored in the headwinds, it continues to offer significant potential for income investors.
JR Research, a seasoned investor and expert in aggressive growth at a reasonable price, recently updated his thesis on Enbridge. He anticipated the stock would bottom out, leading to an upgrade in his assessment. Following the upgrade, Enbridge experienced a temporary rally through its April highs.
Although Enbridge faced a steep decline through the end of May, it formed another bottom, indicating a bear trap or false downside breakdown. This development suggests that dip buyers returned strongly to defend the stock. Over the past six to seven weeks, Enbridge has been consolidating constructively, despite uncertainties surrounding its Mainline pipeline volume and the Line 5 court ruling.
This positive trend has increased JR Research’s conviction in Enbridge’s thesis, improving the risk/reward ratio for potential buyers. Enbridge’s strong position in the industry is supported by its scale economies and status as one of North America’s most crucial energy infrastructure players.
Enbridge’s predictable distributable cash flow (DCF) and solid earnings profile make it an attractive investment for income investors, who are likely to view steep pullbacks as opportunities to capitalize on temporary market dislocations. Analysts estimate that Enbridge’s revenue growth will decline by 9% in FY23. Therefore, investors will be eagerly awaiting the company’s Q2 earnings release in August to assess any potential changes to its medium- and long-term outlook.
Although uncertainties surrounding its mainline volume persist, ENB’s current valuation is believed to have already incorporated these challenges. Therefore, Enbridge’s forward DCF and its secure payout ratio of 60% to 70% are not expected to be immediately at risk of revision.
Furthermore, Enbridge’s management has maintained a target leverage ratio of 4.6x and possesses an annualized investment capacity of $6 billion, including $3 billion of discretionary capital. This strong financial position enables Enbridge to support its investment opportunities adequately. Additionally, management is well-prepared to engage in stock buybacks when appropriate, given ENB’s attractive risk/reward profile.
While Enbridge’s forward EBITDA multiple of 11.6x surpasses that of its oil and gas peers (5.9x according to S&P Cap IQ data), a direct comparison against sector peers may not be the most accurate assessment due to its less cyclical earnings profile. In contrast, comparing its valuation multiple against its 10-year average of 13.4x suggests that the market has likely incorporated a significant amount of pessimism, making dip buyers increasingly confident.
Taking into account Enbridge’s constructive consolidation along its 200-week moving average (MA) and the substantial support at its December 2021 levels ($46), it is reasonable to expect a strong buying response from investors. Given Enbridge’s earnings visibility and attractive relative valuation, JR Research believes it is appropriate to further upgrade the thesis on Enbridge for income investors.
