Finding any energy stock with the sort of upside potential a doubling over the next three years would imply is difficult. But picking a company with a very robust dividend yield (and one which I think should eventually come down as the company’s share price rises over time), it’s entirely feasible to see the kind of 20% or so annual return that would be required to get to such a result.
One of the top energy stocks I think has this kind of upside potential right now is Enbridge (TSX:ENB). The pipeline operator has seen rather impressive growth in recent years, as the chart below shows. However, I think there’s still plenty of upside potential ahead, particularly if certain trends continue over the course of the next few years.
Aside from the fact that ENB stock has already doubled over the course of the past five years, here’s why I think Enbridge is one company many growth investors may be overlooking right now.
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Exceptional recent earnings performance
One of the things I like about Enbridge’s rise (shown above) is that there’s about as strong of a fundamental basis for this move as in any company I look at right now.
In fact, the company’s first-quarter (Q1) report surged past expectations on most fronts. The company’s revenue surged more than 22% on a year-over-year basis. This drove adjusted earnings to rise 12% (with Generally Accepted Accounting Principles earnings actually surging 43% over the same quarter the year prior) as the company ramped up its efficiency metrics and made operating efficiency a strategic priority and point of emphasis in terms of execution.
Despite these strong earnings metrics, Enbridge’s valuation remains very attractive. Shares of ENB stock trade at just 21 times forward earnings, putting this stock in value territory, at least in my books. Any company that can grow its earnings per share at twice the rate of its forward price-to-earnings multiple is one I want to consider in any environment.
Strong growth outlook
Of course, buying a stock that trades at half its forward growth rate is a great thing. But that given company will need to deliver on this expected growth moving forward.
In the case of Enbridge, I think there are reasons for investors to remain confident in the company’s ability to do just that. The company has reaffirmed its forward guidance, suggesting the company should produce between $5.50 and $5.90 per share in free cash flow. Over the long term, the company expects to produce mid-single-digit earnings growth. So, there may be some slowing, but not much over time.
And given the predictable nature of the company’s revenues (which are locked in due to long-term contracts with the company’s key customers), this is a stock with plenty of upside potential over time, in my view.
A doubling in value over the next three years is certainly possible — Enbridge has done this before and could do it again. If market conditions cooperate, I could see even higher returns over the next three years as a decent probability.
