Does MPLX LP's (NYSE:MPLX) PE Ratio Signal A Selling Opportunity?

The current price of MPLX places the company at a large trailing PE of 21.74x, more than 1.62 times above the Oil and Gas's average of 13.42x. But can investors make a closing judgement of the company’s value based on this bigger multiple? The answer is no, since important variables like the company’s potential to grow and debt levels are ignored in the PE’s calculation. This article will cover some key aspects we should consider in order to determine the best multiple to be used for MPLX. Let's dive in.

Is MPLX making any money?

The PE multiple is useful for when a company is profitable, which is the case with MPLX. This is because the multiple is not applicable to companies that are not generating positive earnings. Companies like this are often valued based off other relevant factors, using multiples like P/S (price-to-sales) or P/FCF (price-to-free-cash-flow) depending on the business characteristics. Previously, MPLX has always produced a positive bottom line. With upcoming earnings expected to remain positive, PE can be a valid multiple to apply to the company, but let’s see if there is a better alternative.

Is MPLX in a lot of debt?

The company’s debt-to-equity ratio is greater than 1, meaning that creditors provide more than half of the company’s capital. This can be risky, given that in the case of bankruptcy, there’s less of a chance you’d get anything back. Though this is an unlikely scenario for a US$27.93b company.

So, what does debt have to do with valuation? The company’s share price theoretically reflects the value of MPLX’s equity only, but its important to account for debt, because debt also contributes to the company’s earnings capacity and risk. This can be done using enterprise value (EV) instead of share price. EV adds in debt and subtracts cash in order to recognise both sources of funding and is commonly used in the EV/EBITDA multiple. Comparing MPLX’s multiple to the 20.26x for the industry suggests the company is overvalued, and whilst the price-to-earnings multiple also showed this, the EV/EBITDA suggests an even greater premium to fair value.

Will MPLX experience high growth?

According to consensus estimates, earnings are expected to compound at 1.02% every year for the next 5 years. This gives MPLX a rather flat but steady trajectory for the future. Therefore it isn’t essential to adjust our EV/EBITDA multiple to reflect future expectations because the future isn’t expected to look too different from the present. In scenarios where there isn’t stability, using analyst’s forward estimate of EBITDA is recommended. For MPLX, this results in a similar multiple of 20.26x.

Next Steps:

Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.