For investors looking to capture the upside of cyclical sectors in this volatile environment, picking and choosing specific companies within given sectors can be the way to go. Indeed, not all energy stocks are even close to being the same. You’ve got producers, refiners, pipeline players such as Enbridge (TSX:ENB), and a host of other companies in the marketing and midstream space as well.
In my view, investing in energy infrastructure companies like Enbridge is something worth considering. Pipeline operators tend to have very stable cash flows over very long periods of time, and companies like Enbridge continue to pay out a significant percentage of these cash flows back to investors over time. If you like capital return and high dividend yields over prolonged periods of time, this is a sector where investors can certainly find what they’re looking for.
That said, the question is just how high a stock like Enbridge can fly over the long term. Here are my one, three, and five-year projections for the stock.
One-year outlook
Enbridge’s most recent performance has signalled that overall revenue growth remains intact, with 5.2% growth seen over the past year. Given that Enbridge’s stock price has increased more than 28% over the past year while its revenue has grown just 5%, it’s clear that some amount of multiple expansion is driving a great deal of the near-term price action in this stock.
Thus, I think investors taking a near-term view of Enbridge stock need to consider whether momentum is the factor they want to trade off of. An argument could be made that this stock is fairly valued at present, and there could be some downside risk here. But if momentum is what you’re after from a trading perspective, this could be a stock that makes sense.
Three and five-year outlooks
Over the medium term, I think Enbridge stock certainly looks more attractive. That’s partly due to the fact that Enbridge has traded near this multiple in the past, and 21 times earnings isn’t necessarily overly expensive for the quality of cash flows investors gain access to by investing in this pipeline giant.
I think Enbridge should be able to see some earnings growth acceleration in coming years, particularly if energy prices remain robust and the company’s ability to increase prices on its core customer base increases. If that’s the case, I think Enbridge stock could easily match this year’s annual performance over the next three years, and grow as much as 50% over the next five years. This is a company I think has the potential to roughly double every decade or so (inclusive of dividends). But, of course, plenty of risks will likely materialize over such a long-term journey, making timing any position difficult.
