Martin Midstream Partners LP (NASDAQ:MMLP) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. It’s crucial to understand if a company has a strong future based on its current operations and financial status.
Firstly, a quick intro on the company – Martin Midstream Partners L.P. collects, transports, stores, and markets petroleum products and by-products in the United States Gulf Coast region. Since starting in 2002 in United States, the company has now grown to a market cap of US$540.87m.
The first thing that struck me was the pessimistic outlook for MMLP. A consensus of 7 US oil, gas and consumable fuels analysts covering the stock indicates that its revenue level is expected to decline by -1.45% by 2020, however, future earnings are expected to grow. On average, MMLP’s bottom-line should see an annual growth rate of 12.18% over the next couple of years, leading to an unsustainable margin expansion driven by a mix of falling sales from core activities and possibly cost-cutting. When revenues are declining and earnings are growing, there’s a big question mark around the sustainability of its current operations.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. Alarm bells rang in my head when I saw MMLP’s debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 8.35% of this large debt amount. Furthermore, its debt-to-equity ratio has also been increasing from 148.02% five years ago, and its EBIT was not able to sufficiently cover its interest payment, with a cover of 1.24x. This does lower my conviction around the sustainability of the business going forward. MMLP has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. MMLP has managed its cash well at a current level of US$184.00k. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
MMLP currently trades at US$13.85 per share. With 39.05 million shares, that’s a US$540.87m market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of -17.53% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$24.50m, the target price for MMLP is US$2.80 is below than the current share price. This means the stock is currently trading at a massive premium. Also, comparing MMLP’s current share price to its peers based on its industry and earnings level, it’s overvalued by 147.29%, with a PE ratio of 33.2x vs. the industry average of 13.43x.
MMLP is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, MMLP doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.